Nonrecurring Items Overview

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Advanced Accounting for Investment Banking

Learn frequently encountered investment banking accounting topics not covered in introductory courses.

04:07:06 of on-demand video • Updated September 2014

  • At course completion, you will be well versed in frequently encountered advanced accounting topics.
English [Auto] Last we turn to the most interesting of these three most common non-GAAP adjustments and that is non-recurring items non-working items are really a cluster of a variety of types of activities which analysts exclude from from the income statement. So there are actually three broad types of activities that even Gath wants you to basically present separately from the rest of the income statement. Those three types of activities are discontinued operations extraordinary items and accounting changes discontinued operations. Our gains and losses from operations that a company has discontinued when a company discontinues or sells off a distinct part of its business the income and expense from this part of the business as well as severance facility closure expenses all will be recognized below net income in a separate category. So it's as is so if there is any revenue during a particular year from a an operation that is all of a sudden now deemed to be discontinued and that will presumably be sold down the road that revenue the soci the expenses all of that are actually separated out of the main income statement and recognizers just one that line net loss or gain from from those discontinued operations below net income. And that's the same from a gap presentation as well as from an analyst presentation there. They're the discontinued operations are generally treated separately from the committeemen causing no problems for us in terms of analyzing earnings per share or profitability or things like that. Same goes for extraordinary items. These are things like losses from the expropriation of assets or accounting changes so for example if a company changes its accounting method for depreciation or inventory accounting let's say they switch from life photo 5:0 the corresponding expenses on the income statement we change under gap. Any impact on the income statement on expenses associated with changes in accounting in nature and accounting rules or assumptions those changes have to be identified separately below the income statement. Making it easy to compare this year's income statement to the prior year income statement without the noise of those changes which do impact the year over year comparisons for the above activities the three that we just talked about discontinued operations. Extraordinary items and accounting changes fabby and analysts are generally in agreement as long as we report them net of taxes as a separate line below net income. It doesn't muddy the waters of ongoing profitability and where I'm going with this is that there are some activities where Fazli and analysts are in disagreement before we get into line items were fabby and analysts are generally in disagreement where the gap based presentation is different from how analysts want to see these items. Let's look at what Wal-Mart's income statement looks like and we see that Wal-Mart in line with the Gap rules that we just talked about for discontinued operations identifies that the net gain or loss from operations that they've deemed to be discontinued is presented distinctly from the rest of their continuing operation. So we have Wal-Mart's revenue costs of goods sold interest expense taxes all the way down to continuing operations. Notice though this line item called income from last of continued operations from discontinued operations represents a net aggregation of revenues net of expenses for entities that are no longer lumped into revenues and expenses here. And so the reason why analysts and Fazli is generally in agreement about the right treatment for this is is analysts don't want to look at the noise. The other option was to identify the income and loss from discontinued operations and bury it within these Lyman's to have revenues be a little bit higher presumably because discontinued operations were generating revenue and as costs and good costs and expenses a little bit higher because there discontinued operations with some expenses but rather take all that out and just net it as a separate line item. That's what Fazli wants to do and that's what analysts want to do. They want to look at core ongoing profitability and basically look at this is something that's already done that's not going to be recurring in the future because next year these operations are going to be presumably discontinued.