Income from continuing operations: Meaning, Criticisms & Real-World Uses

What Is Income from Continuing Operations?

Income from continuing operations represents the earnings generated by a company's core business activities that are expected to persist into the future. It is a key component presented on the income statement within the broader field of financial reporting. This metric reflects the profitability derived from a company's ongoing operations, excluding any gains or losses from segments of the business that have been sold, disposed of, or classified as "held for sale." Analysts and investors closely examine income from continuing operations as it offers a clearer picture of a company's sustainable earning power, separating it from transient or non-recurring events that might otherwise distort the overall net income. It encompasses all revenue and expenses related to the entity's primary operations, as well as non-operating items and income taxes associated with these ongoing activities.

History and Origin

The distinction between income from continuing operations and other components of comprehensive income evolved to provide greater transparency in financial reporting. Prior to significant accounting pronouncements, the full impact of divested business segments might have been commingled with ongoing results, making it difficult for users of financial statements to assess a company's true operational performance. The Financial Accounting Standards Board (FASB) has continually refined the criteria for reporting various income statement components. A notable development occurred with Accounting Standards Update (ASU) No. 2014-08, which narrowed the definition of a "discontinued operation" to focus on disposals that represent a "strategic shift" that has or will have a major effect on an entity's operations and financial results. This refinement clarified what should be excluded from income from continuing operations, ensuring that only significant, strategic changes impact the separate reporting of discontinued activities.⁴ This historical refinement aimed to enhance the relevance and predictive value of financial information.

Key Takeaways

Income from continuing operations reflects a company's profitability from its primary, ongoing business activities.
It excludes the financial results of business segments that have been sold, disposed of, or classified as discontinued operations.
This metric is crucial for assessing a company's sustainable earning capacity and its ability to generate future cash flows.
Its clear presentation on the income statement aids investors and analysts in making informed decisions by focusing on the core business.

Formula and Calculation

Income from continuing operations is calculated by taking a company's gross profit from its core activities, subtracting operating expenses, adding or subtracting other non-operating income and expenses, and finally subtracting applicable income taxes.

The general formula is:

\text{Income from Continuing Operations} = \\ \text{Revenue} - \text{Cost of Goods Sold} - \text{Operating Expenses} \pm \text{Other Non-Operating Items} - \text{Income Tax Expense}

Where:

Revenue: Total sales generated from the company's primary business activities.
Cost of Goods Sold (COGS): Direct costs attributable to the production of the goods or services sold by the company. Cost of goods sold is a crucial determinant of gross profit.
Operating Expenses: Costs incurred in the course of ordinary business operations, such as selling, general, and administrative expenses, and depreciation.
Other Non-Operating Items: Gains or losses from activities not central to the company's main business, such as interest income, interest expense, or gains/losses from investments, provided they are not part of a discontinued operation. Non-operating income can significantly impact this figure.
Income Tax Expense: The tax burden specifically allocated to the income derived from continuing operations.

Interpreting the Income from Continuing Operations

Interpreting income from continuing operations involves analyzing its trends over time and comparing it against competitors. A consistent increase in this figure suggests a healthy and growing core business. Investors often prioritize this number over overall net income because it filters out the noise from one-time events or the sale of business segments, which are reported separately as discontinued operations. For instance, a company might report a high net income due to a large gain from selling a division. However, if its income from continuing operations is stagnant or declining, it signals underlying weaknesses in the ongoing business. Financial analysis typically focuses on the sustainability and growth of income from continuing operations to project future performance and value.

Hypothetical Example

Consider "Tech Innovations Inc.," a company that manufactures and sells software solutions. For the fiscal year ending December 31, 2024, Tech Innovations Inc. reports the following:

Software Sales (Revenue): $10,000,000
Cost of Goods Sold (Software Development): $2,000,000
Selling, General & Administrative Expenses: $3,500,000
Research & Development Expenses: $1,500,000
Interest Income: $50,000
Income Tax Expense: $800,000

To calculate the income from continuing operations:

Calculate Gross Profit:
$10,000,000 (Revenue) - $2,000,000 (Cost of Goods Sold) = $8,000,000
Calculate Operating Income:
$8,000,000 (Gross Profit) - $3,500,000 (Selling, General & Administrative) - $1,500,000 (R&D) = $3,000,000
Add/Subtract Other Non-Operating Items:
$3,000,000 (Operating Income) + $50,000 (Interest Income) = $3,050,000
Subtract Income Tax Expense:
$3,050,000 - $800,000 (Income Tax Expense) = $2,250,000

Tech Innovations Inc.'s income from continuing operations for the year is $2,250,000. This figure highlights the profitability of its core software business before considering any potential results from discontinued segments, such as if it had sold off a hardware division during the year. This calculation is a vital step in preparing complete financial statements.

Practical Applications

Income from continuing operations is a cornerstone of financial analysis and investor relations. It is prominently featured in a company's annual report, which includes the comprehensive set of financial statements.³ Investors use this figure to assess a company's sustainable earnings power, enabling more accurate forecasting of future profits and cash flows. Lenders evaluate it to gauge a company's ability to repay debt from its core activities. For instance, in its first-quarter 2024 results, Thomson Reuters reported "Consolidated Financial Highlights" including revenue momentum and organic revenue growth, which implicitly derive from their continuing operations, demonstrating the real-world application of focusing on core business performance. Furthermore, regulatory bodies like the Securities and Exchange Commission (SEC) and accounting standard setters such as the FASB regularly issue guidance and updates that impact how income from continuing operations is presented and disclosed. For example, the FASB issued Accounting Standards Update 2023-05 in December 2023, which modifies rules on income tax disclosures, requiring entities to separate income or loss from continuing operations before income tax expense or benefit between domestic and foreign sources.² This regulatory emphasis underscores the importance of this specific income component for transparent and comparable financial reporting.

Limitations and Criticisms

While income from continuing operations offers valuable insights, it does have limitations. One criticism revolves around the definition and criteria for what constitutes a "discontinued operation," which directly impacts what remains classified as continuing. Under Generally Accepted Accounting Principles (GAAP) in the U.S., a disposal qualifies as a discontinued operation only if it represents a "strategic shift that has (or will have) a major effect on an entity's operations and financial results."¹ This principle, while providing clarity, can lead to situations where significant, non-recurring events that don't meet the "strategic shift" threshold are still included in continuing operations, potentially obscuring a clear view of truly ongoing core profitability. For instance, the sale of a small, non-core asset might not qualify as a discontinued operation, but the associated gain or loss would still be included in income from continuing operations, potentially skewing the results. Analysts must scrutinize the "Other Non-Operating Items" section to identify such events. Furthermore, aggressive accounting policies or discretionary management decisions around expense recognition can also impact the reported income from continuing operations. Understanding these nuances is vital for a comprehensive financial analysis.

Income from Continuing Operations vs. Discontinued Operations

Income from continuing operations and discontinued operations are two distinct categories on a company's income statement, representing different aspects of its financial performance. The key difference lies in their nature and expected future impact.

Feature	Income from Continuing Operations	Discontinued Operations
Definition	Earnings from the company's ongoing, primary business activities that are expected to persist.	Gains or losses from business segments that have been sold, disposed of, or classified as held for sale.
Future Outlook	Represents sustainable and predictable earning power.	Represents non-recurring events with no future impact on the company's ongoing core operations.
Presentation	Typically presented at the top of the income statement, before discontinued operations.	Presented separately, net of tax, after income from continuing operations.
Analytical Focus	Investors focus on this to forecast future performance and assess operational efficiency.	Primarily analyzed for one-time impact; not indicative of future core profitability.
Included Items	Sales, cost of goods sold, operating expenses, non-operating income/expenses, and related income taxes.	Operating results (revenues, expenses) of the discontinued segment up to the disposal date, and gains/losses on disposal.

Confusion can arise because both contribute to a company's total net income. However, the separation is critical for users to understand which portion of the income is recurring and sustainable versus which is a one-time event resulting from a strategic divestiture.

FAQs

What is the primary purpose of separating income from continuing operations on the income statement?

The primary purpose is to provide a clear view of a company's sustainable operating performance. By separating it from the results of discontinued operations, financial statement users can better assess the profitability of the core business that is expected to continue into the future.

Is income from continuing operations reported before or after tax?

Income from continuing operations is typically reported before the income tax expense specifically attributable to those operations. The income tax expense related to continuing operations is then presented separately. This allows for a pre-tax analysis of the operating performance.

How does income from continuing operations relate to earnings per share?

Income from continuing operations is a crucial input for calculating earnings per share (EPS) from continuing operations, which analysts often consider more relevant for forecasting future EPS than total EPS, as it excludes the impact of non-recurring events.

Does income from continuing operations include non-operating items?

Yes, income from continuing operations can include non-operating items (like interest income or expense) that are not part of a discontinued segment. The key is that these items are related to the ongoing entity, even if they aren't directly tied to the primary revenue-generating activities.