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Summarizing Nonrecurring Items and Determining Sustainable Earnings
The work to this point has laid out important background and provided specific examples, but it is not
complete. Still required is a device to assist in summarizing information discovered in nonrecurring
items so that new measures of sustainable earnings can be developed. The balance of this chapter is
devoted to presenting a worksheet designed to summarize nonrecurring items and illustrating its use
using a case study. 37
The Sustainable Earnings Base Worksheet: Downloadable Exhibit 3.23
The sustainable earnings base (SEB) worksheet is shown in Exhibit 3.23. Detailed instructions on
completing the worksheet follow:
1. Net income or loss as reported is recorded on the top line of the worksheet.
2. All identified items of nonrecurring expense or loss, which were included in the income
statement on a pretax basis, are recorded on the “add” lines provided. Where a prelabeled line is
not listed in the worksheet, a descriptive phrase should be recorded on one of the “other” lines
and the amounts recorded there. In practice, the processes of locating nonrecurring items and
recording them on the worksheet would take place at the same time. However, effective use of
the worksheet calls for the background provided earlier in the chapter. This explains the
separation of these steps in this chapter.
3. When all pretax, nonrecurring expenses and losses have been recorded, subtotals should
be computed. These subtotals are then multiplied times 1 minus a representative combined
federal, state, and foreign income tax rate. This puts these items on an after-tax basis so that they
are stated on the same basis as net income or net loss.
4. The results from step 3 should be recorded on the line titled “tax-adjusted additions.”
5. All after-tax nonrecurring expenses or losses are next added separately. These items are
either tax items or special income statement items that are disclosed on an after-tax basis under
GAAP (e.g., discontinued operations, extraordinary items, or the cumulative effect of accounting
changes). The effects of LIFO liquidations are sometimes presented before tax and sometimes
after tax. Note that a line item is provided for the effect of LIFO liquidations in both the pretax
and the after-tax additions section of the worksheet.
6. Changes in deferred-tax valuation allowances are recorded in the tax-adjusted additions
(or deductions) section only if such changes affected net income or net loss for the period.
Evidence of an income statement impact will usually take the form of an entry in the income tax
rate-reconciliation schedule.
7. The next step is to subtotal the entries for after-tax additions and then combine this
subtotal with the amount labeled “tax-adjusted additions.” The result is then recorded on the
“total additions” line.
8. Completion of the next section of the worksheet, for nonrecurring revenues and gains,
follows exactly the same steps as those outlined for nonrecurring expenses and losses.
9. With the completion of section two, the sustainable earnings base for each year is
computed by adding the “total additions” line item to net income (loss) and then deducting the
“total deductions” line item.
Exhibit 3.23 Adjustment worksheet for sustainable earnings base.