Non-Recurring and Non-Operating Items | CFA Level I FSA

In this lesson, we’ll explore non-recurring and non-operating items, and how to segment the income statement based on these items. Let’s dive in!

Recurring and Non-Recurring Items

One of the objectives of the income statement is to allow users to assess a company’s future earnings. It’s often helpful to separate items that are likely to continue in the future from those that are less likely to continue. These are known as recurring and non-recurring items.

Items that are clearly not expected to continue in future periods should be reported separately from continuing operations in the income statement. Examples of such items include:

• Discontinued operations
• Extraordinary items
• Unusual or infrequent items
• Accounting changes

Discontinued Operations

A discontinued operation is one that the management has decided to dispose of but either has not yet done so or has done so in the current year after the operation generated income or losses. To be accounted for as a discontinued operation, the business must be physically and operationally distinct from the rest of the firm.

Any income or loss from discontinued operations is reported separately in the income statement, net of tax, after income from continuous operations.

Extraordinary Items

An extraordinary item is a material transaction or event that is both unusual and infrequent in occurrence. Examples include losses from an expropriation of assets and uninsured losses from natural disasters. Extraordinary items are reported separately in the income statement, net of tax, after income from continuing operations.

Note that classification of extraordinary items is prohibited under IFRS and, for reporting periods after December 2015, under US GAAP as well.

Unusual or Infrequent Items

Unusual or infrequent items are, as the name implies, items which are unusual in nature, or infrequent in occurrence, but not both. Examples include gains or losses from the sale of assets or part of a business and impairments, write-offs, write-downs, and restructuring costs.

Unusual or infrequent items are included in income from continuing operations and are reported before tax. An analyst should assess whether the items reported are likely to reoccur.

Accounting Changes

Accounting changes include changes in accounting principles, changes in accounting estimates, and prior-period adjustments. Some examples of accounting changes are:

• Change in inventory accounting from LIFO to FIFO
• Change in estimated residual value of a long-lived asset
• Correction of an error for a prior period

Non-Operating Items

Another way of segmenting the income statement is to separate the operating items from the non-operating items. Under US GAAP, operating activities generally involve producing and delivering goods, providing services, and include all transactions and other events that are not defined as investing or financing activities.

Interest income and interest expense for non-financial service companies are considered non-operating items. However, for financial service companies, interest income and expense are likely components of operating activities.

That’s it for our lesson on non-recurring and non-operating items. We hope you found it informative and engaging. Join us in the next lesson where we’ll learn how to calculate earnings per share from the income statement.