Analyzing Business Earnings 67The discussion to this point has taken us through the first six steps in the
nonrecurring-items search process outlined in Exhibit 2.3. The seventh and
last step illustrates how additional nonrecurring items may sometimes be lo-
cated in other selected notes to the financial statements.
NONRECURRING ITEMS IN OTHER SELECTED NOTES
Typically, most material nonrecurring items will have been located by proceed-
ing through the first six steps of the search sequence in Exhibit 2.3. However,
some additional nonrecurring items may be located in other notes. Nonrecur-
ring items can surface in virtually any note to the financial statements. We will
now discuss three selected notes that frequently contain other nonrecurring
items: notes on foreign exchange, restructuring, and quarterly and segment fi-
nancial data. Recall that inventory, income tax, and other income and expense
notes have already been discussed in steps 3 to 5.
Foreign Exchange Notes
Foreign exchange gains and losses can result from both transaction and transla-
tion exposure. Transaction gains and losses result from either unhedged or par-
tially hedged foreign-currency exposure.^37 This exposure is created by items
such as accounts receivable and accounts payable resulting from sales and pur-
chases denominated in foreign currencies. As foreign-currency exchange rates
change, the value of the foreign-currency assets and liabilities will expand and
contract. This results, in turn, in foreign currency transaction gains and losses.
This is the essence of the concept of currency exposure.
Translation gains and losses result from either unhedged or partially
hedged exposure associated with foreign subsidiaries. Translation exposure de-
pends on the mix of assets and liabilities of the foreign subsidiary. In addition,
the character of the operations of the foreign subsidiary and features of the
foreign economy are also factors in determining both exposure and the transla-
tion method applied. There are two possible statement translation methods,
and of the two only one results in translation gains or losses that appear as
EXHIBIT 2.23 Reported and revised earnings per
share: C.R. Bard Inc., years ended
December 31.
As-Reported Earnings Adjusted Earnings
Year per Share per Share
1997 $1.26 $1.67
1998 4.51 1.76
1999 2.28 2.27
SOURCE: C.R. Bard Inc., annual report, December 1999.