Discontinued operations are production functions that are being phased out or have ceased to exist. Companies may shut down facilities due to factors such as obsolescence or geographic issues. Discontinued operations are treated differently in accounting records and are typically sold quickly to avoid additional taxes.
Discontinued operations involve any production function of a company that is in the process of being phased out or has ceased to exist. This could include production facilities that have been closed and are currently for sale. Discontinued operations are accounted for differently from continuing operations in the company’s accounting records.
A company may choose to shut down operations of a facility or division of the company due to a number of factors. Products produced in a particular 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 salable product, a decision can be made to close the facility and sell the assets related to the operation before further loss occurs.
At other times, operations at specific facilities may be discontinued due to geographic issues. This is especially true when transportation costs between facilities begin to undermine the profitability of maintaining a relatively remote plant or storage facility. In this scenario, the company can choose to outsource production to another company that is closer and shut down the remote facility.
While discontinued operations may include a decision to stop producing certain products, simply making a change to a product line does not constitute true discontinued status for an operation. If the facilities used to produce the discontinued product are adapted to manufacture a different product, the operation will be classified as continuous and will not be treated as an asset to be sold. The key to classifying as discontinued operations lies in whether the asset is no longer of value to the company and must be sold to avoid or minimize losses. If the operation can be adapted or recovered in any way and continues to function, the operation remains classified as continuous.
It is rare for a company to retain ownership of discontinued operations for an extended period of time. Generally, the facility, along with any equipment and other assets related to the operation, are disposed of as quickly as possible. This allows the company to avoid paying additional taxes on properties and assets that are no longer productive.
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