Both IFRS and US GAAP specify that the results of discontinued operations should be reported separately from continuing operations. Other items that may be reported separately on a company’s income statement, such as unusual items, items that occur infrequently, effects due to accounting changes, and non-operating income, require the analyst to make some judgments.
Unusual or Infrequent Items
IFRS require that items of income or expense that are material or relevant to the understanding of the entity’s financial performance should be disclosed separately. Unusual or infrequent items are likely to meet these criteria. Under US GAAP, material items that are unusual or infrequent, and that are both as of reporting periods beginning after December 15, 2015, are shown as part of a company’s continuing operations but are presented separately.
Discontinued Operations
Results of discontinued operations are presented on a net basis at the bottom of the income statement, including on a per share basis. The remaining parts of income statement (e.g., revenue, costs of goods sold, EPS from the remaining businesses) are the results of continuing operations and are disclosed as such. Assets and liabilities related to the discontinued operations are aggregated and recognised on the balance sheet as held for sale. This presentation allows an analyst to clearly evaluate continuing versus discontinued operations.
Changes in Accounting Policy
Retrospective application means that the financial statements for all fiscal years shown in a company’s financial report are presented as if the newly adopted accounting principle had been used throughout the entire period. Notes to the financial statements describe the change and explain the justification for the change. Because changes in accounting principles are retrospectively applied, the financial statements that appear within a financial report are comparable.
Changes in Scope and Exchange Rates
Depending on the size of the target relative to the acquirer, an acquisition can materially affect the comparability of the acquirer’s financial results and position from prior periods. Additionally, changes in exchange rates often affect multinational companies’ income statements (e.g., a strengthening functional currency against the reporting currency increases reported revenues, while a declining functional currency against the reporting currency decreases reported revenues). Unfortunately, accounting standards do not require issuers to disclose the effects of either scope or exchange rate changes on the financial statements or in individual items, although most issuers disclose useful summary information (such as revenue and EPS growth rates excluding scope and exchange rate changes) in management reporting or elsewhere.
