Question

Why are discontinued operations not included in the valuation of a company?

Answer 1

Discontinued operations are the results of operations of a component of a business entity which is either being held for sale or has already been disposed of, thus are not included in the valuation of a company. Although the component of business is being disposed of, however could still generate a loss or gain in the current accounting period. Thus, the total loss or gain from the discontinued operations is reported, followed by the relevant taxes on income. These are separately listed on the income statement from continuing operation thus allows investors to clearly distinguish among the profits and cash flows from continuing operations from activities which had been ceased. It is very beneficial when businesses merge because parsing out which assets are being divested or folded up provides a clearer picture of how a business will make money in the future.