38 Understanding the Numbers
or simply employing a fairly recent average value for the gains in making earn-
ings projections.
After 1996, Delta Air Lines disclosed little in the way of nonrecurring
gains on the sale of f light equipment. Its 2000 annual report, which covered
the years from 1998 to 2000, did not disclose any gains or losses on the disposi-
tion of f light equipment.^5 With hindsight, the first option, which would re-
move all of the gains and losses on f light equipment, may have been the most
appropriate alternative.
The Goodyear Tire and Rubber Company provides a timeless example of
the impact of nonrecurring items on the evaluation of earnings performance.
Exhibit 2.2 shows pretax results for Goodyear, with and without losses on for-
eign exchange.
As with Delta Air Lines, it may seem questionable to characterize as non-
recurring exchange losses that appear repeatedly. However, in line with the key
characteristics of nonrecurring items given earlier, Goodyear ’s foreign exchange
losses are both irregular in amount and unlikely to be consistent contributors to
results in future years. Across the period 1993 to 1995 the reduction in foreign
exchange losses contributed to Goodyear ’s pretax results by $35.5 million in
1994 and $60.2 million in 1995. That is, the entire $60.1 million increase in earn-
ings for 1995 could be attributed to the $60.2 million decline in foreign exchange
losses. The only way that the foreign exchange line could contribute a further
$60.2 million to pretax earnings in 1996 would be for Goodyear to produce a for-
eign exchange gain of $42.8 million ($60.2−$17.4).^6
Other examples of irregular items of revenue, gain, expense, and loss
abound. For example, there were temporary revenue increases and decreases
associated with the Gulf War. (“Sales to the United States government in-
creased substantially during the Persian Gulf War. However, sales returned to
more normal levels in the second half of the year.”^7 ) Temporary revenue in-
creases have been associated with expanded television sales due to World Cup
EXHIBIT 2.2 The Goodyear Tire and Rubber Company, results with
and without foreign-exchange losses, years ended
December 31 (in millions).
1993 1994 1995
Income before income taxes, extraordinary
item and cumulative effect of
accounting change $784.9 $865.7 $925.8
Add back foreign exchange losses 113.1 77.6 17.4
Income exclusive of foreign-exchange losses $898.0 $943.3 $943.2
Percentage income increase:
Income as reported 10.3% 6.9%
Income exclusive on foreign-exchange losses 5.0% 0.0%
SOURCE: The Goodyear Tire and Rubber Company, annual report, December 1995, 24.