The Portable MBA in Finance and Accounting, 3rd Edition

35

2

ANALYZING

BUSINESS

EARNINGS

Eugene E. Comiskey

Charles W. Mulford

A special committee of the American Institute of Certified Public Accoun-
tants (AICPA) concluded the following about earnings and the needs of those
who use financial statements:

Users want information about the portion of a company’s reported earnings

that is stable or recurring and that provides a basis for estimating sustainable

earnings.^1

While users may want information about the stable or recurring portion of
a company’s earnings, firms are under no obligation to provide this earnings se-
ries. However, generally accepted accounting principles (GAAPs) require sep-
arate disclosure of selected nonrecurring revenues, gains, expenses, and losses
on the face of the income statement or in notes to the financial statements.
Further, the Securities and Exchange Commission (SEC) requires the disclo-
sure of material nonrecurring items.
The prominence given the demand by users for information on nonrecur-
ring items in the above AICPA report is, no doubt, driven in part by the explo-
sive growth in nonrecurring items over the past decade. The acceleration of
change together with a passion for downsizing, rightsizing, and reengineering
have fueled this growth. The Financial Accounting Standards Board’s (FASB)
issuance of a number of new accounting statements that require recognition of
previously unrecorded expenses and more timely recognition of declines in
asset values has also contributed to the increase in nonrecurring items.
A limited number of firms do provide, on a voluntary basis, schedules that
show their results with nonrecurring items removed. Mason Dixon Bancshares