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Several studies have found that companies‟ use of non-GAAP measures in financial reporting has
decreased since the SEC rule (Regulation G) took effect. 4 Some companies have found other ways to
disclose nonrecurring or unpredictable items without specific reference to non-GAAP measures.
Exhibit 3.2 shows a table from an annual report of Coca-Cola Enterprises, Inc., providing detailed
reasons for changes in its operating income.
Exhibit 3.2 Analysis of changes in operating income: Coca-Cola Enterprises, Inc., year ended
December 31, 2007.
Source: Coca-Cola Enterprises, Inc., annual report, December 2007.
Note that this disclosure includes both core business issues, such as product mix and price/cost
shifts, and nonrecurring effects, such as restructuring and impairment charges.
To varying degrees, typically in footnotes or in the textual discussion of financial results, companies
provide information regarding the effects of idiosyncratic events and transactions on net income.
However, the often formidable task of determining a firm‟s sustainable or core earnings—a process
sometimes called “normalizing earnings”—remains the responsibility of the financial statement user.
The central goal of this chapter is to help users develop the background and skills to perform this
critical aspect of earnings analysis. The chapter covers income statement formats and the nature of
nonrecurring items, and it outlines efficient approaches for locating them in financial statements and
associated notes. Throughout the chapter, information drawn from the financial statements of many