632598256894

companies is used for illustration. A summary exercise offers a comprehensive example of removing
all nonrecurring items from reported results in order to arrive at a sustainable earnings series.
The Nature of Nonrecurring Items
It is difficult to provide a comprehensive definition of nonrecurring items. Unusual or infrequent in
occurrence are qualities that are often cited in defining nonrecurring items. Donald Kieso, Jerry
Weygandt, and Terry Warfield, in their popular intermediate accounting text, use the term irregular to
describe what most statement users would consider nonrecurring items. 5 For our purposes, irregular or
nonrecurring revenues, gains, expenses, and losses are not consistent contributors to results, in terms
of either their presence or their amount. This is the manner in which we use the term nonrecurring
items throughout this chapter.
From a security valuation perspective, nonrecurring items could be characterized as items having a
smaller impact on share price than recurring elements of earnings. Some items can often be identified
as nonrecurring simply by their basic nature (e.g., restructuring charges, litigation settlements, flood
losses, product recall costs, embezzlement losses, and insurance settlements). Other items may affect
net income every year, but vary widely in sign (revenue versus expense, gain versus loss) and amount.
For example, the following gains on the sale of marketable securities were reported over a number of
years by Archer Daniels Midland Company: 6
The gains averaged about $122 million over the five years ending in 2008, but obviously varied
substantially from one year to the next. It would be difficult to characterize these gains as
nonrecurring, but they are certainly irregular in amount.
There are at least three different ways to handle this line item in revising results for the purpose of
identifying sustainable or recurring earnings. The first—and the most common—approach is simply to
eliminate the item altogether. This solution is persuasive in the illustration because Archer Daniels
Midland is a food processor, and transactions related to its portfolio of marketable securities are not
associated with its core business. But consider a different example. Northwest Airlines reported the
following gains (losses) on the disposition of property and equipment. 7
Again, these amounts are both irregular and unpredictable, and eliminating them from measures of
sustainable earnings is a common technique. In this case, however, some users would see these