What Is a Nonrecurring Gain or Loss?
A nonrecurring gain or loss is a one-off, highly infrequent profit or charge not arising from a company’s normal course of business operations. These one-time items are reported separately in a corporation's income statement—net of income taxes—and are excluded from earnings per share (EPS) calculations.
- A nonrecurring item refers to an entry that is infrequent or unusual that appears on a company's financial statements.
- They are recorded separately in an income statement and excluded from EPS calculations as they are not considered part of normal business operations.
- These can include litigation charges, charges related to letting workers go, restructuring charges, gains or losses from the sale of assets, one-time write-offs or write-downs, and losses related to shutting down a business unit.
Understanding a Nonrecurring Gain or Loss
Companies list all their revenues, expenses, gains, and losses on their income statement, one of three financial statements used for reporting financial performance over a specific accounting period. From this, investors can establish how much money the company brought in and, even more importantly, how much of this income it managed to keep hold of.
Sometimes the concluding net income (NI) figure, what a company earns after expenses, interest, and taxes, can be unfairly skewed by unusual and irregular items, though. One-time, nonrecurring events that have nothing to do with everyday business operations can inflate or deflate earnings, distorting the true financial performance of a company.
Capital gains from the sale of land or business divisions are examples of nonrecurring gains. Nonrecurring losses, meanwhile, could include asset write-downs, settlement and litigation fees, a slowdown of operations due to natural disasters, restructuring costs, and costs associated with acquiring another business.
Write-offs or write-downs relating to normal business expenses (i.e., inventory) are not considered nonrecurring losses unless they are due to one-time events, such as a natural disaster.
These nonrecurring events result in gains or losses and, therefore, must be reported on a company’s income statement. They are, however, required to be disclosed separately from normal income so that analysts and investors can see how the business performed over a specific accounting period, independent of any unusual incomings and outgoings.
Recording a Nonrecurring Gain or Loss
The Financial Accounting Standards Board (FASB), the body responsible for setting and maintaining disclosure rules, asks companies to provide a breakdown of items classified as nonrecurring in the footnotes to their financial statements. This allows analysts, investors, shareholders, and other stakeholders the opportunity to scrutinize them and determine whether to exclude them from earnings forecasts.
Often, companies will voluntarily provide an adjusted earnings number that strips out the impact these nonrecurring items have on profit for the period. It is also likely that any big nonrecurring gain or loss is commented on in greater detail in management discussion and analysis (MD&A), a section of a financial statement in which management addresses its performance.
Nonrecurring Gain or Loss vs. Extraordinary Items
Sometimes, nonrecurring gains and losses might also be referred to as "extraordinary items.”
Until recently, Generally Accepted Accounting Principles (GAAP) stipulated that anything labeled as extraordinary must “possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity.” Examples of events considered rare enough to meet that criteria included casualty losses such as those from theft, fire, or natural disaster.
Companies used to put a lot of effort into determining if a particular gain or loss fell into this category. That’s because gains and losses net of taxes from extraordinary items had to be shown separately on the income statement after income from continuing operations.
Then, in January 2015, the FASB eliminated the concept of extraordinary items from U.S. GAAP in order to reduce the cost and complexity of preparing financial statements. In other words, companies must still disclose infrequent and unusual events but now no longer need to designate them as extraordinary.
Investors should carefully examine a company's financial statements to see what types of nonrecurring gains and losses a company they are holding posts and how frequently managements engage in these types of transactions. While by their very nature nonrecurring gains and losses are meant to occur very infrequently, the reality is that companies often understate their expense levels by classifying some items as nonrecurring.
It’s important to be aware of creative accounting strategies and to be careful calculating EPS, the most widely used metric for valuing stocks, when nonrecurring items are present. Companies are required by law to follow certain accounting standards. However, that doesn’t mean that they won’t find loopholes and do their best to champion figures that present them in a positive light.