Extraordinary, Recurring, and Unusual Items
The rule for estimating both operating and net income is
simple. The operating income that is used as a base for
projections shouldreflectcontinuing operations and should
not include any items that are one-time or extraordinary.
Puttingthisstatementtopracticeisoftenachallengebecause
there are four types of extraordinary items:
- One-time expenses orincome that is trulyone-time. A
largerestructuringchargethathasoccurredonlyonceinthe
prior 10 yearswouldbeagoodexample.Theseexpensescan
be backed out of the analysis and the operating and net
incomecalculatedwithoutthem;thesamecanbedonewith
one-time income.
2.Expensesandincomethatdonotoccureveryyearbutseem
torecuratregularintervals.Consider,forinstance,afirmthat
hastakenarestructuringchargeeverythreeyearsforthelast
12 years.Whilenot conclusive,thiswouldsuggestthatthe
extraordinaryexpensesarereallyordinaryexpensesthatare
beingbundledbythefirmandtakenonceeverythreeyears.
Ignoring suchan expensewouldbe dangerous becausethe
expected operating income in future years would be
overstated. What would make sense would be to take the
expenseand spreaditout onan annualbasis. Thus,if the
restructuringexpenseforeverythreeyearshasamountedto
$1.5 billion, on average, the operating income should be
reducedby$0.5billiontoreflecttheannualchargeduetothis
expense.
- Expenses and income that recur every year but with
considerablevolatility.Thebestwaytodealwithsuchitems