What Is a One-Time Item?
Let me explain what a one-time item is: it's a gain, loss, or expense on the income statement that's nonrecurring and not part of a company's ongoing business operations. When you're trying to gauge a company's operating performance accurately, you usually exclude these one-time items, just like analysts and investors do. Keep in mind that while many one-time items reduce earnings or profit, some actually add to earnings in the reporting period.
Key Takeaways
You need to remember that a one-time item is a nonrecurring gain, loss, or expense on the income statement. It's not considered part of the company's ongoing operations. That's why analysts and investors exclude them to evaluate the company's core performance properly.
Understanding One-Time Items
One-time items get recorded either under operating expenses or below earnings before interest and taxes (EBIT). EBIT is basically the company's profit without factoring in interest on debt or taxes. Net income, which you find at the bottom of the income statement, is the profit after all costs, expenses, and revenues are accounted for.
For instance, if a company sells an asset, that could inflate net income for the period as a one-time item. These are also known as unusual items or nonrecurring items.
Types of One-Time Items
- Restructuring charges, such as when a company modifies its debt structure.
- Asset impairment or write-off, which happens when an asset's market value is lower than its balance sheet value.
- Loss from discontinued operations, from shutting down an operation.
- Loss from early retirement of debt, like paying off bonds early.
- M&A or divestiture-related costs from mergers and acquisitions.
- Gain or loss from an asset sale, such as selling equipment.
- Extraordinary legal costs.
- Natural disaster damage costs.
- Charge from a change in accounting policy.
Explaining One-Time Items
A company might list a one-time item separately on its income statement if it's straightforward. But many publicly-traded companies report consolidated financial statements that aggregate performance from multiple subsidiaries or businesses. This makes reporting easier, but it means you, as an investor or analyst, have to dig deeper into what's behind those numbers. One-time items might not show up separately in these consolidated statements.
Instead, the company could group them into a line like 'other income' for gains or a separate line for nonrecurring charges. There's usually a footnote number next to these, pointing to a detailed explanation in the footnotes section of the management discussion and analysis (MD&A) in quarterly or annual reports.
Benefits of One-Time Items
Reporting one-time items separately ensures transparency in financial reporting. These items let you separate charges or gains that aren't part of the core operating revenue. Management doesn't expect them to recur, so listing them explicitly on the income statement or in the MD&A allows for a better assessment of the business's ongoing income-generating capacity.
This helps investors, analysts, and creditors analyze the company's financial performance. Banks lending to companies want to know how much revenue comes from core operations. Credit covenants often require companies to meet certain financial thresholds.
One-time items can skew earnings positively or negatively. Bankers need to strip them out to check covenant compliance. For example, if a car company has a large one-time gain from selling equipment, you would remove that gain and recalculate net income or EBIT.
Management flags these as one-time, but it's up to you as an analyst or investor to decide if they truly are. Take oil and gas companies that sell assets when prices are low—these gains might seem one-time, but if it's frequent, it's part of their business. You have to conclude if frequent one-time items indicate poor management or financial trouble.
Real World Example of a One-Time Item
Consider General Electric (GE), which owns several companies and operates in industries like aviation, healthcare, and renewable energy. In its Q1 2020 10-Q report, GE had restructured and sold some businesses.
On the income statement, there's a line for 'Other Income' showing $6.87 billion, referencing Note 23. To understand this, you go to the notes section.
Note 23 reveals this $6.87 billion is a net amount. GE had a $12.37 billion gain from selling its BioPharma division, listed under 'Purchases and sales of business interests.' But there was also a $5.63 billion loss in investment income, netting to $6.87 billion.
This shows how one-time items can be grouped into other lines. Nonrecurring items might appear separately or aggregated like this.
Since one-time items can distort financial performance, you should always check the footnotes to investigate them thoroughly.
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