What are Discontinued Operations?

Discontinued operations involve any production function of a company that is either in the process of being phased out or has already ceased to take place. This can include production facilities that have been shut down and are currently offered for sale. Discontinued operations are accounted for differently from continuing operations in the accounting records of the company.

A business may choose to terminate the operations of a facility or a division of the company due to a number of factors. The products produced at a given facility may become obsolete or lose their appeal to the buying public. If the equipment at the facility cannot be adapted to manufacture other products that still represent a saleable product, the decision may be made to close the facility and sell off the assets related to the operation before any more loss takes place.

At other times, operations at particular facilities may be discontinued due to geographic issues. This is especially true when transportation costs between facilities begin to erode the profitability of maintaining a relatively remote plant or storage facility. In this scenario, the company may choose to outsource the production to another company that is in closer proximity and shut down the remote facility.

While discontinued operations may include a decision to stop producing certain products, simply making a change in a product line does not constitute a true status of discontinuance to an operation. If the facilities used to product the discontinued product are adapted to manufacture a different product, the operation is classified as continuing and is not treated as an asset that is to be sold. The key to classification as discontinued operations rests in whether the asset is of no more value to the company and should be sold to avoid or minimize loss. If the operation can be adapted or salvaged in any manner and allowed to continue functioning, the operation remains classified as continuing.

It is rare that a company will retain ownership of discontinued operations for an extended period of time. Usually, the facility along with any equipment and other assets connected with the operation, are disposed of as soon as possible. This allows the company to avoid paying any additional taxes on property and assets that are no longer productive.