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The nonrecurring items of Boston Scientific and Monster Worldwide both result from adjustments
to their deferred tax asset valuation allowances. The allowance balances represent the portion of tax
benefits that have been judged unlikely to be realized. 24 Increasing or decreasing this balance will
create a nonrecurring tax charge or benefit, respectively. The prospects for realization of the tax
benefit must have declined for Boston Scientific but improved for Monster Worldwide, although these
changes are highly discretionary.
Eli Lilly has a tax reduction that is associated with operations located in Puerto Rico. It is also
common to see such tax benefits produced by firms with operations in other countries. These benefits
are designed to encourage companies, typically manufacturing companies, to locate in foreign
countries. In many cases these benefits are for a limited period of time, though renewals of the benefit
are sometimes possible. As a result, while the benefits are real, there remains a possibility that they
will cease at some point in time. Eli Lilly reports in its tax note:
We have a subsidiary operating in Puerto Rico under a tax incentive grant. The current tax
incentive grant will not expire prior to 2017.
When a company reports tax benefits due to the location of operations in other countries, the
possibility that the benefits might end or be reduced should be considered. In this case, however, we
would treat the effect as recurring at least for the next 10 years.
Nonrecurring Items in the Other Income and Expense Note
An “other income (expense), net” or equivalent line item is commonly found in both the single and the
multistep income statements. In the case of the multistep format, the composition of other income and
expenses is sometimes detailed on the face of the income statement. In both the multistep and singlestep
formats, the most typical presentation is a single line item. Even though a note detailing the
contents of other income and expense may exist, guidance is typically not provided as to its specific
location. Where present, other income and expense notes tend to be toward the end of the notes to the
financial statements.
Colgate-Palmolive Company uses a multistep format income statement and includes “other
(income) expense, net” in operating income. The supporting note is provided in Exhibit 3.19.
Although these net amounts are small relative to Colgate-Palmolive‟s operating income (over $2.6
billion in 2007), the volatility invites a closer look at the components. While some are recurring and
steady, note the uneven effects of restructuring charges, gains on sales of product lines, and
investment losses (income), and the nonrecurring effects of the voluntary product recall and SFAS 88
charges. Although the amounts are modest, on an adjusted basis, 2006 operating income increased by
$60 million instead of the reported decrease of $55 million. In both 2005 and 2007 the nonrecurring
items are largely offsetting, a common smoothing technique.
Exhibit 3.19 Composition of an other income and expense note: Colgate-Palmolive Company,
years ended December 31 (millions).