What is a 'Non-Cash Charge'
Non-cash charges are expenses that can be found in a company's income statement, but they are not accompanied by a cash outflow. These are accounting expenses that can represent meaningful changes to a company's financial standing without affecting short-term capital in any way. Depreciation, amortization, depletion, stock-based compensation and asset impairments are common expenses that reduce earnings but not cash flows.
BREAKING DOWN 'Non-Cash Charge'Investors need to distinguish between cash and non-cash expenses, because they have very different ramifications for financial health and valuation. Non-cash expenses from accrual accounting are different from non-recurring charges related to special events. One-time charges may not reflect a company's actual operations over the period when they are recognized.
Non-cash charges are necessary for companies that use accrual basis accounting. Depreciation, amortization and depletion are expensed throughout the useful life of an asset that was paid for in cash at an earlier date. The company's profits did not fully reflect the cash outlay for the asset at that time, so it must be reflected over a set number of subsequent periods. These charges are made against accounts on the balance sheet, reducing the value of items in that statement. Depreciation is generally associated with property, plant and equipment (PP&E). Amortization reduces intangible assets, such as capitalized development expenses. Depletion reduces the value of natural resource holdings. Exxon Mobil Corporation reported $18 billion of depreciation and depletion expense in 2015, representing predetermined reductions in the value of existing assets. The company's actual cash outlays on additions to PP&E were $26.5 billion that year.
Non-cash charges can also reflect one-time accounting losses that are driven by changing balance sheet items. Such charges are often the result of changes to accounting policy, corporate restructuring, changing market value of assets or updated assumptions on realizable future cash flows. Stratasys Limited's $900 million goodwill impairment expense from the third quarter of 2015 is a great example of a nonrecurring non-cash charge. Goodwill is added to the balance sheet when an acquisition exceeds the fair value of the acquired entity, and it must be impaired in the future if the value of the acquired assets falls below original expectations. Goodwill is an intangible asset, so these impairments may not fairly represent the company's performance during the period. Many companies are therefore inclined to treat non-cash charges as one-time events and report adjusted earnings that exclude the impact of such charges.