What Is an Earnings Recast?
An earnings recast is the act of amending and re-releasing a previously released earnings statement, with specific intent. Some of the most typical reasons for recasting earnings are to show the impact of a discontinued business or to separate out earnings-related events that are deemed to be non-recurring or otherwise non-representative of normal business earnings.
An earnings recast is also known as an "earnings restatement."
- An earnings recast is when a company amends and re-releases an earnings statement that has already been made public, due to needing to correct or update the statement.
- Earnings recasts are often undertaken to reflect the impact of a discontinued business or to separate out earnings-related events that are determined to be non-recurring or otherwise unusual in the context of normal business earnings.
- Earnings might also be updated or recast after auditors see signs of fraud or incompetence in previous financial statements.
- An earnings recast is usually not done for a quarter at a time, but more often for several years of income statements, depending on how far back the recasting goes.
How an Earnings Recast Works
Earnings, the amount of profit that a company produces during a specific period, are very closely watched by investors. These figures drive share prices more than anything else and are a key component of perhaps the most common method to value companies: the price-to-earnings ratio (P/E ratio). In short, that means that any changes to earnings are a very big deal.
An earnings recast is usually done to several years of income statements, depending on how far back the recasting goes. In theory, restating earnings benefits investors, helping them to get a better comparative sense of how the company is progressing over time.
Information regarding any earnings recast released by a publicly-traded company should be stated in the footnotes of the earnings report.
Earnings Recast and Fraud
Because earnings are an important metric that significantly impacts share prices, companies sometimes manipulate them. Though illegal and highly unethical, this practice is not as rare as it should be.
That means that earnings recasts are not always the result of changes to a company’s business structure or accounting standards. Sometimes, prior earnings are updated because auditors spotted traces of fraud or incompetence in previous financial statements.
Over-reporting a company’s gains can be very misleading, prompting investors to believe the company is in a stronger financial position than is actually the case. Earnings recasts made as a result of such behavior understandably have a habit of seriously denting investor confidence and wiping out share prices.
Real World Example
Not a traditional earnings recast, but for its Q1 2022 earnings release, Twitter announced that it had to recast certain previously reported data related to the number of users it had. The company stated that due to an error in linked accounts, it reported more users than it actually had for the past three years.
The company reran the numbers to report its accurate user base, providing investors with a table that showed the previously reported users and the recasted users. For example, in Q4 2021, Twitter reported it had 216.6 million users but with the recast data, it had 214.7 million.
The over-reporting of users by Twitter has implications for its advertisers as advertisers seek to reach as many users as possible. If a company is demonstrating user growth, advertisers are more likely to spend their marketing budget on a company's platform. Though Twitter's user base has been growing, over-reporting can be an issue if Twitter does not reach its user growth targets.
What Does It Mean to Recast Financials?
Recasting financials means adjusting your financial statements from what was previously reported. The reason to recast can be many, but primarily involve removing items that do not properly reflect the company's core business. These items are known as non-recurring items.
What Does Recast Mean for Mortgages?
A mortgage recast involves the mortgage lender recalculating the monthly payments on a loan based on the amount outstanding and the term. A mortgage recast is done when the borrower makes a lump-sum payment, pays more every month than what is required, or makes a few extra payments.
What Is Earnings Power?
Earnings power demonstrates the ability of a company to generate profits over the long term if all operational aspects remain consistent. Earnings power is usually viewed as earnings before interest and taxes (EBIT) divided by total assets.