A nonrecurring charge is an entry that appears on a company's financial statements for a one-time expense that is unlikely to happen again. The company typically explains a nonrecurring charge, and an analyst will usually adjust the income statement when assessing financial performance for a period and valuing the shares on an "adjusted" basis.
Breaking Down Nonrecurring Charge
A nonrecurring charge appears on an income statement and in some instances on the cash flow statement as well if the charge is non-cash. The company's earnings are correspondingly reduced for the time period shown on the income statement. However, in the management discussion and analysis (MD&A) section the company will try to explain that a particular nonrecurring charge is for a one-time, unusual event, and should not be considered an expense that the company will be exposed to again in the future.
There are numerous examples of nonrecurring charges:
- Restructuring charges inclusive of severance pay and factory closings
- Asset impairment charges or write-offs
- Losses from discontinued operations
- Losses from early retirement of debt
- M&A or divestiture-related expenses
- Losses from the sale of assets
- Abnormal legal costs
- Natural disaster damage costs
- Charges stemming from changes in accounting policy
Adjusting for Nonrecurring Charges
Analysts will add back legitimate expenses that management of a company label as "nonrecurring." If such charges seem to occur with a certain frequency that they become recurring, however, then investors will not give management this benefit when assessing financial performance and modeling the valuation of the shares. For example, if a company takes restructuring charges every other year, it may be considered part of normal operating expenses. The identification and treatment of nonrecurring charges could also have implications for credit agreement definitions and executive compensation plans. A debt-to-EBITDA covenant, for example, may allow for add-backs of nonrecurring charges to EBITDA in a loan agreement. If nonrecurring charges are not counted against net income in an executive compensation plan, then management may feel at more liberty with taking these charges in a fiscal year.