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CFA Level I Exam · Analyzing Income Statements

Non-Recurring Items and Discontinued Operations Explained

Updated 7 October 2026 · Fact-checked

Non-recurring items are gains or losses unlikely to repeat, such as unusual or infrequent items, restructuring charges and discontinued operations. Under IFRS, discontinued operations are shown as one after-tax line below continuing operations. To analyze, you separate recurring from non-recurring items, remove the latter, and tax-effect any adjustment.

Understand Non-Recurring Items and Discontinued Operations

A company's net income mixes two things: results from its normal, ongoing business, and one-off events. Analysts forecast future earnings, so they care most about the part that will repeat. That is why the income statement separates some items.

Discontinued operations start with a component of the business that has been disposed of or is classified as held for sale. Under IFRS 5, that component is a discontinued operation only if it also meets one of three criteria. It represents a separate major line of business or geographical area of operations. Or it is part of a single coordinated plan to dispose of a separate major line or area. Or it is a subsidiary acquired exclusively with a view to resale. US GAAP uses a similar but not identical test, which is based on whether the disposal represents a strategic shift with a major effect on operations and results. Under both frameworks, the results of that component, plus any gain or loss on disposal, are shown as a single line after tax, below income from continuing operations. Prior periods are restated so the continuing figures are comparable. Because the business is gone, you exclude this line when forecasting.

A discontinued operation is different from an asset that is only being abandoned or a business that is simply scaled down. Those stay in continuing operations. Also, the line is reported net of tax, so you do not tax-effect it again.

Unusual or infrequent items are gains or losses from events that are unusual in nature, infrequent in occurrence, or both. Examples are a gain on selling an asset, an impairment charge, or a litigation settlement. Under IFRS, these stay within continuing operations and are not shown separately as extraordinary items. IFRS requires separate disclosure of items whose size or nature makes it relevant to understanding performance. US GAAP also does not allow extraordinary items on the face of the income statement. Analysts usually remove the after-tax amount of the item from net income. You get that amount by multiplying the pre-tax amount by (1 − tax rate). Removing the item from pre-tax earnings and then recomputing tax gives the same result, as long as you use the same tax rate.

Restructuring charges are costs of reorganizing, such as severance and plant closure. They are often labelled non-recurring, but companies that restructure every year are showing a recurring cost. Judge them by how often they appear. Also watch for over-large provisions that are later reversed to lift earnings.

Key formulas to remember

Net income structure
Net income = Income from continuing operations + Income (loss) from discontinued operations, net of tax
Discontinued operations are already after tax. Exclude the line when forecasting.
After-tax adjustment of a pre-tax item
After-tax amount = Pre-tax amount × (1 − tax rate)
Use this when removing an unusual or infrequent item that sits in continuing operations.
Adjusted (normalized) net income
Adjusted net income = Reported net income − After-tax gains + After-tax losses − Discontinued operations income (or + loss)
Remove gains, add back losses, and strip out discontinued operations.
Adjusted EPS
Adjusted EPS = Adjusted net income available to common ÷ Weighted average shares
Use the same share count as reported EPS unless told otherwise.
Classification rule (IFRS)
Discontinued operation = component disposed of or held for sale, and a separate major line or geographical area
Presented as a single after-tax amount; prior periods restated. Extraordinary items are not allowed under IFRS.

How to solve Non-Recurring Items and Discontinued Operations questions

Use this order for any question on non-recurring items, discontinued operations or restructuring.

  1. 1Identify each item and where it is reported: continuing operations or the discontinued operations line.
  2. 2Classify it: discontinued operation, unusual or infrequent item, or restructuring charge.
  3. 3Decide whether it is likely to recur. A charge that appears every year should be treated as recurring.
  4. 4For items inside continuing operations, remove the pre-tax amount and apply the tax rate to get the after-tax effect.
  5. 5For discontinued operations, remove the reported amount as it is, because it is already net of tax.
  6. 6Compute adjusted net income, then adjusted EPS if asked, using the weighted average shares.
  7. 7Check the direction: removing a loss raises earnings, removing a gain lowers them.
  8. 8Pick the option that matches your direction and size, and eliminate the other two.

Quickest way: Strip, tax, adjust

When to use it: Use when a question gives net income, an unusual item and a tax rate, and asks for adjusted earnings or EPS.

  1. Start from income from continuing operations if given. This already drops discontinued operations.
  2. Take the unusual item and multiply by (1 − tax rate).
  3. Lose the gain by subtracting it. Recover the loss by adding it.
  4. Divide by shares if EPS is asked.
  5. Sanity check the direction. Only two options will usually fit the direction.

Common mistakes in Non-Recurring Items and Discontinued Operations

  • Tax-effecting the discontinued operations line again.

    Students apply the tax rate to every adjustment automatically.

    Fix: Discontinued operations are reported net of tax. Only tax-effect pre-tax items in continuing operations.

  • Subtracting a loss instead of adding it back.

    Students confuse removing an item with deducting it.

    Fix: Remove means reverse its effect. A loss lowered income, so add it back. A gain raised income, so subtract it.

  • Treating every restructuring charge as non-recurring.

    Companies label them one-off.

    Fix: Check frequency. Repeated charges across years are recurring operating costs and should stay in your forecast base.

  • Calling an item extraordinary under IFRS.

    Older textbooks used extraordinary items.

    Fix: Neither IFRS nor US GAAP permits extraordinary items on the income statement. Unusual or infrequent items stay in continuing operations.

  • Treating any asset sale or shutdown as a discontinued operation.

    The word discontinued sounds broad.

    Fix: It must be a component representing a separate major line of business or geographical area, disposed of or held for sale. Otherwise it is part of continuing operations.

Worked examples

Example 1

A company reports income from continuing operations of $480 million and a loss from discontinued operations, net of tax, of $30 million. It has 200 million weighted average shares. What is reported EPS, and what EPS should an analyst use for forecasting?

Show the solution
  1. Reported net income = 480 − 30 = $450 million.
  2. Reported EPS = 450 ÷ 200 = $2.25.
  3. For forecasting, remove the discontinued operations loss, which is already after tax: 480 million.
  4. Forecasting EPS = 480 ÷ 200 = $2.40.

Answer: Reported EPS is $2.25 and forecasting EPS is $2.40.

Example 2

A company reports net income of €120 million, which includes a pre-tax gain of €20 million from selling land and a pre-tax restructuring charge of €10 million that the analyst judges to be truly one-off. The tax rate is 25%. There are 50 million shares. What is adjusted EPS?

Show the solution
  1. After-tax gain = 20 × (1 − 0.25) = €15 million. Subtract it.
  2. After-tax restructuring charge = 10 × (1 − 0.25) = €7.5 million. Add it back.
  3. Adjusted net income = 120 − 15 + 7.5 = €112.5 million.
  4. Adjusted EPS = 112.5 ÷ 50 = €2.25.

Answer: Adjusted EPS is €2.25, compared with reported EPS of €2.40.

Exam tips

  • Look for the phrase net of tax. If the item is already after tax, do not apply the tax rate.
  • Remember the direction rule: remove gains, add back losses. Use it to eliminate options quickly.
  • Conceptual questions often test that IFRS bans extraordinary items and that discontinued operations need a separate major line or area.
  • If a question says restructuring charges occur every year, the intended answer treats them as recurring.
  • With 90 seconds per question, do the arithmetic once, then match the option. Numeric options run smallest to largest, so a direction check often removes two choices.

Practice questions from Analyzing Income Statements

Non-Recurring Items and Discontinued Operations in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Non-Recurring Items and Discontinued Operations: frequently asked questions

How are discontinued operations shown on the income statement?

They appear as one line after income from continuing operations, net of tax. It includes the operating results of the component and any gain or loss on its disposal. Prior periods are restated to match.

Are extraordinary items allowed under IFRS?

No. IFRS does not allow items to be presented as extraordinary. Unusual or infrequent items stay in continuing operations and are disclosed separately if their size or nature is relevant to understanding performance.

Should analysts exclude restructuring charges?

Only if they are truly one-off. If a company reports restructuring charges year after year, they behave like a recurring cost. Excluding them would overstate sustainable earnings.

Do I tax-effect adjustments for discontinued operations?

No, because the line is already reported net of tax. You only tax-effect pre-tax unusual or infrequent items that sit within continuing operations.