Analyzing Business Earnings 65continuing operations and, in each case, indicate the extent to which income
was so affected. In addition, describe any other significant components of rev-
enues and expenses that, in the registrant’s judgment, should be described in
order to understand the registrant’s results of operations.^31Complying with this regulation will require some firms to identify and discuss
items that may have already been listed in other financial statements and notes.
In reviewing the MD&A with a view to locating nonrecurring items, the ana-
lyst should focus on the section dealing with results of operations. Here man-
agement presents a comparison of results over the most recent three years;
comparing, for example, 2001 with 2002 and 2002 with 2003 is standard.
Locating nonrecurring items in MD&A is somewhat more difficult than
locating them in other places. Typically the nonrecurring items in MD&A are
discussed in text and are not set out in schedules or statements. However, a
small number of firms do summarize nonrecurring items in schedules within
MD&A. These tend to be more comprehensive and user-friendly than piece-
meal disclosures embedded in text.
The disclosure presented earlier in Exhibit 2.1 provided a restatement of
the as-reported net income of Mason Dixon Bancshares. This restatement re-
moved the effects of all items considered by Mason Dixon to be nonrecur-
ring.^32 This disclosure was found in the MD&A of Mason Dixon. An additional
example of the disclosure of nonrecurring items from the MD&A of Phillips
Petroleum Company is presented in Exhibit 2.22. Unlike Mason Dixon, Phillips
Petroleum’s schedule simply presents a listing of their nonrecurring items.
Phillips Petroleum uses the term “special items” to describe the items in
Exhibit 2.22. The reluctance to refer to these items as “nonrecurring” is under-
standable. Four of the seven line items include amounts in each of the three
EXHIBIT 2.22 Nonrecurring items included in MD&A of
financial condition and results of operations:
Phillips Petroleum Company, years ended
December 31 (in millions).
1997 1998 1999
Kenai tax settlement $83 $115 —
Property impairments (46) (274) $(34)
Tyonek prospect dry hole costs — (71) —
Net gains on asset sales 16 21 73
Work force reduction charges (3) (60) (3)
Pending claims and settlements 15 108 35
Other items — 23 (10)
Total special items $65 $(138) $61Note:The above numbers have been presented on an after-tax basis. Also, in a footnote to
this schedule, not provided here, Phillips disclosed that the 1997 and 1998 numbers had
been restated to exclude foreign-currency transaction gains and losses. That is, they were
previously considered to be special (nonrecurring) items but now are not.
SOURCE: Phillips Petroleum Company, annual report, December 1999, 33.