632598256894

is a pretax measure, but income from continuing operations is after tax. A more extensive sampling of
items included in operating income is provided next.
Nonrecurring Items Included in Operating Income
A review of recent corporate annual reports reveals that the inclusion in operating income of
nonrecurring revenues, gains, expenses, and losses is common. A sample of nonrecurring items
included in the operating income section of multistep income statements is provided in Exhibit 3.7. As
is typical, nonrecurring expenses and losses are more numerous than nonrecurring revenues and gains.
This disparity is due in part to the conservatism principle underlying GAAP, which requires
recognizing certain unrealized losses (e.g., asset impairments), but prohibits the recognition of most
unrealized gains.
Many of the nonrecurring expense or loss items involve the recognition of declines in the value of
specific assets. Restructuring charges are among the most common items in this section of the income
statement. These charges involve asset write-downs and liability accruals for costs such as severance
expenses that will be paid off in future years and are typically described in detail in a note.
There is substantial variety in the nonrecurring expenses and losses included in operating income.
Some of the listed items appear to be closely linked to operations; inventory write-downs, for
example, are integral to operating a retail business. However, some items appear to be at the fringes of
normal operating activities. Examples related to expenses and losses would include the expropriated
asset impairment charges of ConocoPhillips, Warner Music‟s loss on termination of management, and
Hewlett-Packard‟s pension settlement charges. Among the gains, the Alliant Energy and Iron
Mountain gains on selling fixed assets would seem to be candidates for inclusion further down in the
income statement, as would Humana‟s investment income (since Humana is not a financial services
firm).
Once the items included in operating income are compared to those that are excluded, it is apparent
that management exercises considerable judgment in its classification of these items. Clearly,
operating income, when reported, may not be a reliable measure of ongoing operating performance,
given the wide range of nonrecurring items that are included in its determination.
Nonrecurring Items Excluded from Operating Income
Unlike the multistep format, the single-step income statement does not include a subtotal representing
operating income. Nonrecurring items of revenue or gain and expense or loss are either presented as
separate line items within the listing of revenues or gain and expense or loss or are included in an
“other income (expense)” line. Multistep income statements may also include an “other income
(expense)” item, typically after the calculation of operating income. A sampling of nonrecurring items
found in the “other income (expense)” category of the multistep income statements of a number of
companies is provided in Exhibit 3.8.