You have followed a diversified manufacturer for four years and you keep a small spreadsheet: revenue, operating profit and profit after tax, one row a year, typed in from each annual report as it arrived. This year’s report lands and revenue reads ₹6,200 crore. Your sheet says the company did ₹8,400 crore last year. That is a fall of a quarter, and the share price has not moved. You read the result twice before noticing a line you have never had to think about before, sitting below the profit from continuing operations: profit from discontinued operations. The packaging division was sold in October. And in the report in front of you, last year’s revenue is printed as ₹5,900 crore — not the ₹8,400 crore that same company published twelve months ago, in a document you have on your desk.
Nothing has been misstated and nothing has been hidden. The company has done precisely what the reporting standard requires, which is to show you the business that still exists on both sides of the comparison. The number in your spreadsheet describes a company that included a packaging division. The number in the report describes a company that does not. Your growth rate divides one by the other, and it is the most confidently wrong figure you will produce all year.
Your uncle ran a hardware shop and a small lodge on the same plot. He sold the lodge in December. In January he shows you his books to prove the hardware side is doing well, and he has helpfully taken the lodge out of both this year’s and last year’s columns, so you are looking at the same shop twice. Sensible of him. But you kept a copy of last year’s ledger, lodge included, and if you set your copy beside his new column the hardware shop appears to have lost forty per cent of its trade in a year.
That is exactly what a re-presented comparative does. The company puts both years on the basis of the business it still owns. Anything you wrote down before the sale is on the old basis. Mixing the two produces a growth rate about an entity that never existed.
What actually qualifies
Not every sale triggers this. The presentation is reserved for a component of the business that has been disposed of, or is classified as held for sale, and that represents a separate major line of business or a separate geographical area of operations — or is part of a single coordinated plan to dispose of one — or a subsidiary bought purely to be sold on. Selling one plant belonging to a continuing business does not qualify. Closing a product that is not a major line does not qualify. Watch the middle limb, because it is the one that catches people out: a major line sold off in three tranches across two years is presented as discontinued from the point the coordinated plan exists, not only when the last tranche completes. That distinction matters to you because it tells you what to expect: a genuine discontinued operation is large enough that its removal changes the shape of the company, which is exactly why the standard insists on re-presenting the comparative in the first place.
| Statement | What happens to the prior year | What this does to your series |
|---|---|---|
| Profit and loss | Re-presented — the comparative is restated to show continuing operations only | The report’s own growth rate is honest. Anything you saved earlier is on a different basis |
| Balance sheet | Generally left as previously reported; the held-for-sale block appears in the current year only | Asset and debt series stay on the old basis, so a ratio mixing a re-presented P&L with an unrestated balance sheet is inconsistent |
| Cash flow statement | Usually presented in total, with the discontinued operation’s operating, investing and financing flows disclosed separately | Operating cash flow for the year includes months of a business you no longer own — find the split before comparing it with profit |
| Earnings per share | Disclosed separately for continuing and for discontinued operations, as well as in total | A price-to-earnings ratio built on total EPS in a disposal year is measuring a one-time gain |
What to do about it
- 1Find the disposal note
The note on discontinued operations gives you the division’s revenue, expenses and post-tax result for both years, plus the gain or loss on sale. Everything you need to rebuild either basis is in that one note.
- 2Decide which basis you want
For judging the business going forward, use continuing operations and re-present your own earlier years by subtracting the division. For judging management’s record — what they built and what they sold — the old total basis is the honest one.
- 3Mark the year in your sheet
Whichever you choose, write the change against that row. A note reading "FY25: packaging disposed, prior years re-presented" is worth more in three years’ time than any ratio on the same line.
- 4Strip the gain before valuing
The gain on disposal is real cash and it belongs to you. It is not earnings power. Value the continuing business on continuing earnings and treat the sale proceeds separately, as cash that either sits on the balance sheet, pays down debt or comes back to shareholders.
A company sold a major division mid-year. Total EPS is ₹26.80, of which ₹16.40 comes from the discontinued line, mostly a post-tax gain on the sale. The share trades at ₹340. A screener reports a price-to-earnings ratio of 12.7 and flags the stock as cheap. What is the right reading?
The four words that change a comparison
Each of these appears in ordinary annual reports and each one moves a base.
Chacha ki ek hi plot pe do cheezein thin — hardware ki dukaan aur chhoti si lodge. December mein lodge bik gayi. Ab woh dono saal ka hisaab sirf hardware ka dikha rahe hain, taaki comparison sahi rahe. Par aapki copy mein pichla saal lodge ke saath likha hai. Aap ₹8,400 crore se ₹6,200 crore ghata ke bologe dhanda 26% gir gaya. Report ₹5,900 crore ke saamne wahi ₹6,200 crore rakh rahi hai — 5% badha hua. Ginti dono ki sahi hai; company do alag hain.
- A disposal re-presents the prior year’s profit and loss account; your own saved numbers are on the old basis and cannot be divided into the new ones.
- The prior-year balance sheet is generally left alone, so ratios that mix a re-presented P&L with an unrestated balance sheet are inconsistent.
- The gain on disposal sits inside total EPS, which makes the disposal year look cheap and the following year look expensive.
- Only a separate major line of business or geographical area qualifies — selling one plant of a continuing business does not.
- The disposal note contains both bases; pick one, apply it to every year, and write the change against that row of your sheet.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- discontinued operations meaning in annual report
- Discontinued operations is the presentation used when a company has disposed of, or classified as held for sale, a separate major line of business or a separate geographical area of operations. That division’s entire post-tax result, plus any post-tax gain or loss on selling it, collapses into a single line shown below the profit from continuing operations. Selling one plant belonging to a business that carries on does not qualify.
- when a major division is sold the previous year figures in the profit and loss account are
- Re-presented — the comparative is restated to show continuing operations only, so both years describe the business that still exists. That is why this year’s report can print a prior-year revenue far smaller than the figure the same company published twelve months earlier. The two numbers are not in conflict; they are on different bases, and a growth rate that mixes them describes an entity that never existed.
- is the balance sheet also restated when a division is discontinued
- Generally not. The profit and loss comparative is re-presented on a continuing basis, while the balance sheet is usually left as previously reported, with the held-for-sale block appearing in the current year only. So a ratio that divides a re-presented profit figure by an unrestated asset or debt figure is quietly mixing two bases.
- what happens to depreciation once assets are classified as held for sale
- It stops from the date of classification. Held for sale is a balance-sheet classification made while the company still owns the assets: they and their related liabilities are pulled out of their usual lines and shown as one block, and depreciation on them ceases. This is separate from the discontinued-operations line, which is a profit-and-loss presentation.
- total EPS or continuing operations EPS in the year of a disposal
- Companies disclose earnings per share separately for continuing operations, for discontinued operations and in total, precisely because the three answer different questions. Total EPS in a disposal year includes the post-tax gain on the sale, which happens once and will not repeat, so a price-to-earnings ratio built on it is measuring a one-time event rather than the ongoing business. Continuing-operations EPS is the figure that describes what is still there next year.