Nonrecurring Items & Deferred Charges - Financial Analysis and Reporting | Financial Analysis and Reporting - B Com PDF Download

Nonrecurring Items

A non-recurring item is a gain or loss found on a company’s income statement that is not expected to occur regularly. Examples of non-recurring items are litigation fees, write-offs of bad debt or worthless assets, employee-separation costs, and repair costs for damage caused by natural disasters. Analysts seeking to measure the sustainable profitability of a company typically disregard non-recurring items, as these items are not expected to affect the company’s future net income.

Non-recurring items are not always easily identifiable, as they can appear in different places on an income statement. Sometimes, non-recurring items are added to operating expenses, especially if they are closely connected to company operations (for example, repair fees on machinery). However, if the non-recurring item has a significant effect on the company’s finances, it is listed net of tax on a separate line below net income from continuing operations. Items related to new or discontinued operations, gains or losses due to accounting changes, and “extraordinary items” (items that are both unusual in nature and infrequent in occurrence) are listed this way. The analyst may find more information on a non-recurring item in the footnotes of the income statement or in the Management Discussion and Analysis section at the end of a company’s financial statements.

Deferred charge

A deferred charge is an expenditure that is paid for in one accounting period, but for which the underlying asset will not be entirely consumed until one or more future periods have been completed. Consequently, a deferred charge is carried on the balance sheet as an asset until it is consumed. Once consumed, a deferred charge is reclassified as an expense in the current period.

The following are examples of deferred charges:

• Advertising
• Insurance
• Rent
• Tooling prepayments
• Underwriting fees on a bond issuance

A company may have been required to pay in advance under the terms imposed by a supplier, resulting in a large number of deferred charges. This is particularly common when a company has no established credit, and suppliers are only willing to accept cash-in-advance terms.

In all cases, deferred charges should be itemized on a schedule that states the remaining balance of each item. If deferred charges are being amortized over time, the schedule should state the amount of amortization per period. This schedule is used by the accounting staff to reconcile the balance in the deferred charges account at the end of each accounting period, and to ensure that all required amortization has been completed. This is a necessary document for the auditors, if a business intends to have its books audited at the end of the fiscal year.

If a company does not record any expenditures as deferred charges, it is more likely to be using the cash basis accounting. Deferred charges are required for qualifying transactions under generally accepted accounting principles (GAAP).