What is a Non-Cash Charge
Non-cash charges are expenses that can be found in a company's income statement, but unaccompanied by a corresponding 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 non-cash charges 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 during 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. If a company's profit did not fully reflect the cash outlay for the asset at that time, 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. ExxonMobil Corp. reported $18 billion of depreciation and depletion expenses in 2015, representing predetermined reductions in the value of existing assets. The company's actual cash outlays in 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, the changing market value of assets or updated assumptions on realizable future cash flows. Stratasys Ltd.'s $900 million goodwill impairment expense from the third quarter of 2015 is a great example of a non-recurring 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.