{"id":21876,"date":"2020-01-22T17:58:18","date_gmt":"2020-01-22T22:58:18","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=21876"},"modified":"2024-08-14T06:47:34","modified_gmt":"2024-08-14T11:47:34","slug":"non-recurring-expenses","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/non-recurring-expenses\/","title":{"rendered":"Non-Recurring Charges on the Income Statement (21:15)"},"content":{"rendered":"<p><div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Non-Recurring Charges on the Income Statement<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/non-recurring-expenses\/#Why_Do_Non-Recurring_Charges_Matter\">Why Do Non-Recurring Charges Matter?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/non-recurring-expenses\/#How_Do_You_Find_Non-Recurring_Charges\">How Do You Find Non-Recurring Charges?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/non-recurring-expenses\/#The_Hardcore_Method_of_Finding_Non-Recurring_Charges\">The Hardcore Method of Finding Non-Recurring Charges<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/non-recurring-expenses\/#Do_You_Adjust_for_Non-Recurring_Charges\">Do You Adjust for Non-Recurring Charges?<\/a><\/li><\/ul><\/nav><\/div>\n<br \/>\nA common question we get is &#8220;How do you adjust for non-recurring charges when valuing and analyzing companies?&#8221;<\/p>\n<p>There&#8217;s a ton of confusion around this question, which is made even worse by the fact that non-recurring charges RARELY make a huge difference in models and valuations.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_Do_Non-Recurring_Charges_Matter\"><\/span>Why Do Non-Recurring Charges Matter?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Because they could throw off financial statement analysis and multiples such as EV \/ EBITDA in the historical period.<\/p>\n<p>Example: A company records a big write-down or a big Gain or Loss\uff85 is that item really representative of the company&#8217;s ongoing, recurring business activities? NO!<\/p>\n<p>Example for Alcoa: The big Goodwill Impairment charge of $1.7 billion really throws things off in Year 2, so we should consider adding it back when calculating metrics like EBIT and EBITDA.<\/p>\n<p>But\uff85 does this really matter for valuation \/ financial modeling \/ analytical purposes?<\/p>\n<p>I would say, &#8220;No&#8221; because it&#8217;s not in the most recent period &#8211; and normally you focus on the LTM or Last Fiscal Year figures when calculating valuation multiples.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<p>So you care more about very recent or anticipated non-recurring charges.<\/p>\n<style>.enteremail__large--inline{margin:60px auto!important}<\/style>\n<h2><span class=\"ez-toc-section\" id=\"How_Do_You_Find_Non-Recurring_Charges\"><\/span>How Do You Find Non-Recurring Charges?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Easy Method: Look at the Income Statement and the Cash Flow Statement and search for anything that might be &#8220;non-recurring,&#8221; i.e. it does not appear in every year<\/p>\n<p>It does NOT matter whether an item is cash or non-cash &#8211; all that matters is whether or not it impacts the metric you are calculating, such as EBIT or EBITDA.<\/p>\n<p>Companies will often, though not always, list major non-recurring items on the IS and CFS. Examples for Alcoa:<\/p>\n<p>Goodwill Impairment: This is clearly a non-recurring charge that should be added back, since it appears in only one of six historical years.<\/p>\n<p>Restructuring: We are NOT adding back Restructuring because it&#8217;s effectively a recurring item here.<\/p>\n<p>Stock-Based Compensation, Provision for Doubtful Accounts, etc.: These are non-cash items, but they&#8217;re also very much recurring items, so we do not add them back.<\/p>\n<p>Gains and Losses: We might add these back, but need to determine where they appear on the Income Statement first.<\/p>\n<p>Anything Else: Other charges might exist as well\uff85 we need to do some detective work to find them, time permitting.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_Hardcore_Method_of_Finding_Non-Recurring_Charges\"><\/span>The Hardcore Method of Finding Non-Recurring Charges<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>If you have the time or need a lot more detail, you can sift through the Notes to the Financial Statements and look up possible non-recurring charges in each section.<\/p>\n<p>COGS: A few write-downs\uff85 but are they non-recurring? We would say, &#8220;no.&#8221;<\/p>\n<p>Other Income: Gains from CFS appear there &#8211; so we don&#8217;t add these back since they don&#8217;t impact EBIT or EBITDA at all.<\/p>\n<p>Restructuring: Could make the case that the Loss is non-recurring\uff85 but even that is debatable. In this case, however, we will add back the &#8220;Loss from Divestiture&#8221; portion.<\/p>\n<p>The Restructuring Charge is on pg. 107 of the 10-K and the Gains and Losses are on pg. 133 of the 10-K.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Do_You_Adjust_for_Non-Recurring_Charges\"><\/span>Do You Adjust for Non-Recurring Charges?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>You don&#8217;t &#8220;adjust&#8221; the historical statements themselves &#8211; only metrics like EBIT, EBITDA, etc.<\/p>\n<p>Criterion #1: Is it really non-recurring? Really? HAS NOTHING TO DO WITH CASH VS. NON-CASH!<\/p>\n<p>Criterion #2: Does it actually impact the metric you are adding it back to?<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this tutorial, you will learn why non-recurring charges matter, how they impact a company&#8217;s financial statements and valuation, and how to find them and adjust for them in a financial statement analysis and valuation.<\/p>\n","protected":false},"featured_media":21883,"template":"","class_list":["post-21876","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-financial-statement-analysis"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/21876","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/21883"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=21876"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}