Non-recurring items represent any items in the income statement which are not part of the ongoing operations of the business.
Understanding the past profitability of a business is critical for developing informed views about its future performance. As a consequence, the historical income statement is a key component of this analysis. In order to use the historic income statement as a benchmark for future performance, items that are not expected to recur in the future are often “removed” in order to produce “normalized” numbers.
The identification of non-recurring items is subject to judgement but the following are commonly considered:
- Restructuring / reorganization costs
- Unusual gains or losses
- Accounting policy changes which mean the items will not exist in future
- Fines & penalties
- M&A costs
- Impairments and write downs
- Severance costs
These items are sometimes shown on the face of the income statement as separate line items, but most commonly they are embedded in other line items and only become evident by reviewing more detailed information. Useful sources for identifying non-recurring items include:
- Press release for results announcements
- Management discussion and analysis section of the financials
- Detailed footnotes to the income statement
A review of the footnote (below) reveals embedded non-recurring items. The “special items” are included in Ford Motor Company’s automotive sector costs and, therefore, included in the calculation for reported operating profit.
Ford Motor Company – Extract from Note 24
When calculating EBIT (earnings before interest and taxes), we first find operating profit and add or subtract non-recurring items as appropriate to get EBIT. In the example above, the special items are presented as an expense above operating profit, and therefore must be included as an adjustment when calculating EBIT from operating income.