What are “Non-Recurring Items”?
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.
Key Learning Points
- Non-recurring items represent any reported item in the income statement which is not part of the ongoing operations of the business
- These items are stripped out of a company’s reported operating figure to calculate EBIT
- There is no one place to find these items and analysts need to review the income statement, management, discussion and analysis and the financial statement footnotes to identify them
- Removing non-recurring items helps understand the recurring profit generated by the company’s operations which is used to forecast company data and make insightful predictions on their performance
Identifying Non-Recurring Items
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 Management, Discussion and Analysis
Ford include additional information on the special items:
“In addition, our Automotive sector results include Special Items that consist of (i) personnel and dealer-related items stemming from our efforts to match production capacity and cost structure to market demand and changing model mix, and (ii) certain infrequent significant items that we generally do not consider to be indicative of our ongoing operating activities. Our management excludes these items from its review of the results of the operating segments for purposes of measuring segment profitability and allocating resources. Special items are presented as a separate reconciling item.”
Ford Motor Company – Extract from Notes 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.