Chapter 12 Special Income and Investment Reporting Issues 541Discontinued Operations. A gain or loss from disposing of a business segment
or component of an entity is reported on the income statement as a gain or loss from
discontinued operations. The term business segmentrefers to a major line of business
for a company, such as a division or a department or a certain class of customer. A
componentof an entity is the lowest level at which the operations and cash flows can
be clearly distinguished, operationally and for financial reporting purposes, from the
rest of the entity.^5 Examples would be a store for a retailer, a territory for a sales
organization, or a product category for a consumer products company. To illustrate
the disclosure, assume that Jones Corporation has separate divisions that produce
electrical products, hardware supplies, and lawn equipment. Jones sells its electrical
products division at a loss. As shown in Exhibit 1, this loss is deducted from Jones’
income from continuing operations (income from its hardware and lawn equipment
divisions). In addition, a note should disclose the identity of the segment sold, the
disposal date, a description of the segment’s assets and liabilities, and the manner of
disposal.Extraordinary Items. Anextraordinary itemresults from events and transactions
that (1) are significantly different (unusual) from the typical or the normal operating
activities of the business and(2) occur infrequently. The gains and losses resulting from
natural disasters that occur infrequently, such as
floods, earthquakes, and fires, are extraordinary items.
Gains or losses from condemning land or buildings
for public use are also extraordinary. Such gains and
losses, other than those from disposing of a business
segment, should be reported in the income statement
as extraordinary items, as shown in Exhibit 1.
Sometimes extraordinary items result in unusual
financial results. For example, Delta Air Linesonce
reported an extraordinary gain of over $5.5 million as
the result of the crash of one of its 727s. The plane that
crashed was insured for $6.5 million, but its book value
in Delta’s accounting records was $962,000.
Gains and losses on the disposal of fixed assets
arenotextraordinary items. This is because (1) they
are not unusual and (2) they recur from time to time
in the normal operations of a business. Likewise, gains and losses from the sale of in-
vestments are usual and recurring for most businesses.Changes in Accounting Principles. Businesses are often required to change their
accounting principles when the Financial Accounting Standards Board (FASB) issues
a new accounting standard. In addition, a business may voluntarily change from one
generally accepted accounting principle to another. For example, a corporation may
change from the FIFO to the LIFO method of costing inventory to better match rev-
enues and expenses. Changes in generally accepted accounting principles should be
disclosed in the financial statements (or in notes to the statements) of the period in
which they occur. This disclosure should include the following information:- The nature of the change.
- The justification for the change.
- The effect on the current year’s net income.
- The cumulative effect of the change on the net income of prior periods.
5 Statement of Financial Accounting Standards No. 144, op. cit., par. 41.© PHOTODISC/GETTY IMAGES
International Perspective
International Accounting
Standards (IASs) do not
allow for the reporting of
extraordinary items on the
income statement.
International Perspective
Under IASs, changes in
accounting methods are
not recorded on the in-
come statement, but are
handled by presenting
prior-period financial state-
ments as if the new ac-
counting method had been
used during prior periods.