What are Non-Recurring Items?
Non-Recurring Items are gains and losses recognized on the income statement that must be adjusted, as they are neither part of ongoing core operations nor an accurate reflection of future performance.
Non-Recurring Items: Financial Statement Adjustments
The act of “scrubbing” refers to adjusting financial data for non-recurring items to ensure the company’s cash flows and metrics are normalized to depict its actual ongoing operating performance.
- Recurring Items → Income and Expenses Likely to Continue
- Non-Recurring Items → One-Time Income and Expenses Unlikely to Continue
Public companies must file their financial statements — i.e. the income statement, cash flow statement, and balance sheet — following rules established under Generally Accepted Accounting Principles (GAAP).
But while GAAP attempts to standardize financial reporting in a fair, consistent way with as much transparency as possible, there are still imperfections in certain areas where discretion is necessary.
Understanding the historical performance of a business is critical for forecasting its future performance, since past performance impacts forward-looking assumptions.
Non-Recurring Items: Common Examples
Common examples of non-recurring items are defined in the chart below.
|Impairments (Write-Downs / Write-Offs)||
|Gains / (Losses) on Sale of Assets||
|Employee Severance Packages||
|Income / (Expenses) from Discontinued Operations||
|Mergers & Acquisitions (M&A) Fees||
|Accounting Policy Changes||
Identifying Non-Recurring Items in Financial Reports
When searching for non-recurring items, most of your time should be spent combing through the 10-K and 10-Q reports.
The starting point should be the income statement, where significant non-recurring items are often plainly recorded.
But certain line items are often embedded within other line items, so a more in-depth review is necessary into sections such as:
- Management, Discussion, and Analysis (MD&A)
- Footnotes to Financial Statements
The following terms can be searched for within the filings to be directed toward the right sections.
If there is enough time, earnings calls could also be consulted, but in most cases, the financial statements supplemented with the earnings press release and shareholder presentation are sufficient.
In particular, discussions or content related to non-GAAP financial figures, most notably “adjusted EBITDA” and non-GAAP earnings per share (EPS), can be helpful.
Forward-looking guidance by management on a pro forma basis can sanity check your adjustments, but be mindful of how management is incentivized to present their financials in the best possible light.