The Portable MBA in Finance and Accounting, 4th Edition

3

Analyzing Business Earnings

Virginia Earll Soybel

 

 

 

More than a decade ago, a special committee of the American Institute of Certified Public Accountants (AICPA) concluded the following about earnings and user needs:

Users want information about the portion of a company’s reported earnings that is stable or recurring and that provides a basis for estimating sustainable earnings.¹

While users may want information about the stable or recurring portion of a company’s earnings, firms remain under no obligation to provide this earnings series. However, there are generally accepted accounting principles (GAAP) requirements for separate disclosure of selected nonrecurring revenues, gains, expenses, and losses on the face of the income statement or in notes to the financial statements. Further, the Securities and Exchange Commission (SEC) requires the disclosure of material nonrecurring items.

The prominence given the demand by users for information on nonrecurring items in the AICPA report is, no doubt, driven in part by the explosive growth in nonrecurring items over the past two decades. The acceleration of change, together with a passion for rightsizing and cyclical needs for downsizing, has fueled this growth. The issuance by the Financial Accounting Standards Board (FASB) of a number of new accounting statements, which require recognition of previously unrecorded expenses and more timely recognition of declines in asset values, has also contributed to the increase in nonrecurring ...