Non Recurring Items in Financial Statements - YouTube

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clicking the bell ican friends today we are going to learn tutorial that is

on non-recurring items in the financial statement so let's get into the details

see the financial statements you know they are sort of you know a report of

the performance of the company they form a basically a backbone upon which the

business acumen is based so for the outside world the statements are window

through which one can interpret the health and the wealth of the company

okay so let's look at the income statement of Colgate and in the year

2015 there is a charge of venezuela accounting charge let me show you that

first as you can see this is Colgate company gets company there's a charge of when

venezuela accounting charge over here 1084 so if you notice that

you know the item that has been highlighted over here we see that you

know the operating profit decreases significantly right and due to the

presence get the things clear if you see the operating profit basically over here

is decreasing significantly due to the presence of the item and also and though

this item is not present in the other years like in 2014 and 2013 so this item

is nothing but non recurring item you can see over here there's nothing

mentioned and it can have some serious implication on the financial analyst

also so let's get into the nitty-gritty of the same what are not non recurring

items let's learn first now non recurring items we are going to

learn why when how and where and what are the things that have included it is

it is we have things like restructuring cost right of writedowns

compensation for exploitation losses from the lawsuits

shut down act of God so such are basically non-recurring in nature is a

gain loss from early retirement of debt there's changes in inventory

depreciation methodology in loss due to discontinued operation all of this all

of this is nothing but some of the very important data regarding the non

recurring items seen when tree use extensive sell investors use extensive

the statements in order to decide whether to invest in a firm or not hence

there has to be a transparent disclosure of the revenue and expenses from the

firms end and to ensure that correct information flows to the outside world

but in reality this does not happen most firms report their income and expenses

as for the gap that is the generally accepted accounting principle which is

sometimes difficult to interpret for the analyst like for example a company

purchases a land a gap asked that is the GAAP asked the company to report the

difference between the market price and the purchase price so of land as an

intangible asset and it also asks the form to report the amortization for the

intangible assets or a period of time so such entries are conditional in

nature and are related to the occurrence of the even or purchase of the property

further such entries gave rise to non operating revenues and non operating

expenses as this are not tied up with the core business functions of the form

see gap basically asked the firm to report a single consolidated number single

consolidated number which causes these items to get hidden within the figures

and thus that is leading to the distortion in the valuations I'll give

you some examples of the non recurring items like here are some of the cases

where non recurring items have affected profit favorably or you know unfavorably

the company is referred in the examples are basically hypothetical let's take

the first example as a XYZ over here the bank reported a drop let's

say this is a first example Bank reported a drop of let's say 65% in the

net profit for the September 2015 quarter as a result of the higher

provisioning done to cover the pension gratuity as a result of the higher end

period there is another example let's take ABC farmer his/her own

hypothetical example that I am taking for you the company reported a net loss

let's say of a 100 or let's say 1,000 million so for the MA for the

March 2014 quarter those revenue actually grew close enough to about

30% the loss was basically attributable to the impairment loss

which company took on the goodwill and the other individual assets of its South

African arm so let's discuss some of the types of the non-recurring items now

there are primarily 4 types of non-recurring item first is your unusual

it is unusual or infrequent items second are extraordinary or infrequent items or

again it is known as unusual the third is discontinued operations and the last

one that is third and the fourth one is changes in accounting principle so that

is the last one that is a change in the accounting principle we'll

discuss each and every in in detail the first one unusual items see in the first

type of the non recurring item is infrequent and unusual item see this

items are either unusual or unfrequent but not both

this items are reported pre tax will right for you as pre tax and whereas

the other 3 types over here that I've mentioned are reported post tax

right so now if you see some of the example of unusual write-offs right down

of inventory or receivables gain or loss on the sale of assets subsidiaries

affiliates loss incurred on the plan shut down and so on and so forth

the next is extraordinary item which is also known as infrequent and unusual

this second time of non recurring item is basically extraordinary item

extraordinary items are both infrequent and they are unusual this is very

important both the things and are reported at the net income or net of the

income tax some of the examples I'll take two or three damage caused due to

the fire in plan a gain or loss from the early retirement of the debt and so on

and so forth the next one is discontinued operation see the third type

of the non recurring item is basically discontinued operation this non

recurring item are required to be reported in the FS that is the financial

statement if the operations of a part of the firm

is either being held for sale or or has been already been disposed off so for an

item to be qualified as a part of the discontinued operation 2 basic

conditions should be satisfied the first condition that is there there is no

involvement or influence by the parent company related to the finance or

operational matters with the discontinued component and once the

component has been successfully disposed on so there should not be any influence

in this particular case in the second point is basically the operations and

the cash flows from the disposed component will be eliminated from the

parents operation so operations and cash flows now the next one is changes in

accounting principle if you see in this the fourth non recurring item is change

it changes in the counting principle it happens when you know there is more than

one principle available for applying to a particular financial situation see

remember one thing that you know the changes should be backed by the

rationale that proves that the relevance over here so you know the these changes

have an impact not only on the current here but also on the financial statement

of the prior period as they have to be applied retrospectively to ensure

uniformity now if you talk about retrospective implementation ensures

that you know there is a proper comparison of the same and if we talk

about the proper comparison can be done between the financial statement of

different periods usually an offsetting amount is adjusted to capture the

cumulative effect of such charges let me show you some details regarding the same

now in this particular case as you can see there is revenue COGS GM SGA and

other details over here the important things that we have to notice

extraordinary loss or net of tax that is one cumulative effect for the changes in

the accounting principle net of tax is three so changes in the inventory

management principle from LIFO to FIFO or a specific identity and your

identification method or inventory valuation or vice versa leads

to a significant change in the inventory cost if you if you see about change

change in the depreciation method from state and method to the some digits of

our of service method also leads to some significant changes in the way

depreciation amount is reported now let's learn what problems are just right

for you what are the problems do non recurring items pose to the investors

and the analyst so we'll say the first one is the investors and the analysts

they perform financial statement analysis to estimate the future earning

from current earning in reality the profits reported in the statement are

really noisy and they get distorted by the inclusion of the gains and losses

from the non operating and non recurring item this problem is referred to as

issue of earning quality okay many companies are increasing this non

operating you can say I income as it helps them to hide the losses which they

incur from then on from their normal business operations so if you see the

immediate job of the analyst to identify is the main source of revenue and

expenses and also to identify the extent to which the company's earning depends

on companies earning depends on now finally I am going to show you a example

of a restated income statement due to discontinued operation though the net

income remains unchanged the restated in statement allocates the income between

the income from the continued operations and income from the discontinued

operations let's have a look this is the correction by analyst to identify know

how the actual earnings are been restated the original ones and the

restated one where there was no mention of the discontinued operations but it is

mentioned in the restated from discontinued operations so finally let's

get into the remedies the remedies for dealing with the non-recurring items see

reporting standards follow different approaches when it comes to discipling

the non-recurring items see IFRS if you go it ignores the extraordinary

items completely but reports all other types of various you know gap basically

reports all the types of non recurring item and this items are well explain in

the footnotes of the financial statement the first one is basically to allocate

them within the single financial here see this approach basically talks about

reporting non recurring items with the same financially year though allocating

gains or losses to a single yet does not seems to be right away for handling such

items it is still a preferred preferred when dealing with the items that have

small amount attached to them or they have a very little impact on the

evaluation metrics like EBITDA or net income the second one is basically use

of you can say straight-line spreading

that is known as distributing them historically see this approach basically

emphasize on the principle of the spreading of the non recurring items

over the past accounting periods to estimate the real earning power of the

company the only demerit that it carries that it mailed to misrepresent the

economic fit in economics within the financial period and the last one is

exclude them all together so though it seems basically in this particular case

to be the easiest of the three approaches it involves the lure of

rationalization and logical thinking by the analyst while deciding which item he

or she should exclude there has to be proper justification for the exclusion

and when he or she does this there has to be proper adjustments in the tax to

nullify the gain or loss attached to with them like for example in early

retirement of can be excluded from the current year so

it is suggested suggested that you know these small items which have like have a

very lesser impact on the net income should be accepted within the financial

year itself so I'll just write lesser impact for you second one is that you

know if an item altogether excluded from the proper adjustment it should be done

while reporting the in the income tax and the third one is the items that have

been excluded from the single year analysts should analysis should be

included in the historical statement which encompasses different accounting

periods using the straight-line spreading approach this averages out

their effect just like capitalization averaged out and a newly acquired PP

that is the property plant and equipment over its useful life so that's it for

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