A level-readyAll subjects · Accounting · WAC12 Corporate and Management Accounting
Continuing and discontinued operations and exceptional items
Edexcel IAL Accounting · WAC12 Corporate and Management Accounting
Users of accounts want to predict future profits. To do that they need to separate the parts of the business that will continue from those being closed or sold, and to spot one-off items.
Discontinued operations
A discontinued operation is a part of the company that has been sold or closed, or is held for sale, and that represents a separate major line of business or geographical area (IFRS 5).
In the statement of profit or loss, the results of continuing operations are shown first. The profit or loss from discontinued operations (after tax) is shown as a single line below profit from continuing operations.
Why disclose? Future profits will come only from continuing operations. Showing them separately lets investors forecast, compare years fairly and judge management's decisions.
Exceptional items
IAS 1 requires material items of income or expense to be disclosed separately when their size or nature makes this relevant. In the UK they are often called exceptional items. Examples: large restructuring or redundancy costs, write-downs of inventory or property, profits or losses on disposal of non-current assets, settlement of a major legal case.
Significance: they are usually one-off, so they distort the year's profit. Analysts often remove them to find 'underlying' profit. But if 'exceptional' costs happen every year they are really part of normal trading.
Example
A company reports profit from continuing operations of £1,450,000 and a loss from discontinued operations of £320,000. Profit for the year is £1,130,000. Next year, if the continuing business performs the same, profit would be nearer £1,450,000, because the loss-making division has gone.
| £ | |
|---|---|
| Profit for the year from continuing operations | 1,450,000 |
| Loss for the year from discontinued operations | (320,000) |
| Profit for the year | 1,130,000 |
Worked example
Profit from continuing operations is £2,100,000 after charging an exceptional restructuring cost of £400,000. A division sold in the year made a loss after tax of £150,000. What is a fair estimate of the underlying profit from continuing operations?
- Remove the one-off restructuring cost from continuing operations: 2,100,000 + 400,000
- The discontinued division is excluded because it will not recur
Answer: About £2,500,000
Check yourself
- Profit from continuing operations is £880,000 and the profit from discontinued operations is £60,000. Calculate the profit for the year.
Show answer
£940000. 880,000 + 60,000 = £940,000.
- Profit from continuing operations is £1,250,000 after charging an exceptional loss on a factory closure of £300,000. What is the underlying profit from continuing operations?
Show answer
£1550000. Add back the one-off loss: £1,550,000.
- Why are discontinued operations shown separately?
- Discontinued operations are never taxed
- It reduces the company's tax bill
- Auditors do not check discontinued operations
- Future profits will come only from continuing operations, so users can forecast more accurately
Show answer
Future profits will come only from continuing operations, so users can forecast more accurately. Separating them shows the earnings base that will continue.
- Which is most likely to be disclosed as an exceptional item?
- A large redundancy cost from closing a factory
- Wages of shop staff
- Monthly electricity
- Normal sales commission
Show answer
A large redundancy cost from closing a factory. It is material and unusual in nature; the others are normal recurring costs.
- Where is the profit or loss from discontinued operations shown?
- Within revenue
- In other comprehensive income only
- As a single after-tax line below profit from continuing operations
- In the statement of financial position only
Show answer
As a single after-tax line below profit from continuing operations. IFRS 5 requires a single amount after tax, shown separately.
- Explain why exceptional items are significant to someone comparing a company's profit over two years.
Show answer
They are one-off, unusual items, so they distort the profit for the year; removing them gives the underlying profit and allows a fair comparison with the previous year.. Because exceptional items are unusual, they distort profit; excluding them reveals the underlying trend.
Sources
Last updated 8 November 2026. Spotted a mistake? Tell us.