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More than a decade ago, a special committee of the American Institute of Certified Public
Accountants (AICPA) concluded the following about earnings and user needs:
Users want information about the portion of a company‟s reported earnings that is stable or
recurring and that provides a basis for estimating sustainable earnings. 1
While users may want information about the stable or recurring portion of a company‟s earnings,
firms remain under no obligation to provide this earnings series. However, there are generally
accepted accounting principles (GAAP) requirements for separate disclosure of selected nonrecurring
revenues, gains, expenses, and losses on the face of the income statement or in notes to the financial
statements. Further, the Securities and Exchange Commission (SEC) requires the disclosure of
material nonrecurring items.
The prominence given the demand by users for information on nonrecurring items in the AICPA
report is, no doubt, driven in part by the explosive growth in nonrecurring items over the past two
decades. The acceleration of change, together with a passion for rightsizing and cyclical needs for
downsizing, has fueled this growth. The issuance by the Financial Accounting Standards Board
(FASB) of a number of new accounting statements, which require recognition of previously
unrecorded expenses and more timely recognition of declines in asset values, has also contributed to
the increase in nonrecurring items.
In October 2008, the FASB and the International Accounting Standards Board (IASB) issued a joint
discussion paper proposing new requirements with respect to the presentation of financial statements. 2
This step is only the first in a long deliberation process, but if adopted, income statements in future
years will be more detailed, and the identification of nonrecurring items may become simpler. For the
foreseeable future, though, users of financial statements must analyze the financial statements and
footnotes meticulously to identify the effects of anomalous transactions on earnings, and this chapter
offers a systematic structure to support that analysis.
A limited number of firms do provide, on a voluntary basis, schedules that show their results with
nonrecurring items removed. However, in March 2003 the SEC issued Regulation G—an
implementation of part of the Sarbanes-Oxley legislation—which limits the use of some non-GAAP
measures and requires a formal reconciliation of any non-GAAP income measure with its GAAP
version. 3 Panera Bread Company provides an example of this disclosure. Exhibit 3.1 includes a
schedule that adjusts reported net income to a revised earnings measure, offering greater comparability
across the three-year period.
Exhibit 3.1 Non-GAAP net income: Panera Bread Company, year ended December (in
thousands).
Source: Panera Bread Co., annual report, December 2007.