One-Time Items: Restructuring, Impairments, Gains

Introduction

US GAAP has not allowed any item to be called extraordinary since 2016. Earnings releases did not become simpler as a result: almost every large company still presents an adjusted figure that removes restructuring charges, impairments, acquisition costs, litigation and gains on disposals as items that do not reflect its ongoing performance. Some of those adjustments are fair. Others remove costs that recur every year under a new name.

Separating the two is one of the most consequential judgments in banking. Normalized earnings, the profit a business generates without unusual items, is what multiples are applied to, what buyers pay for and what lenders size debt against. Every dollar of a recurring cost wrongly treated as one-time inflates value by the full multiple.

The Financial Accounting Standards Board (FASB) removed the concept of extraordinary items with Accounting Standards Update (ASU) 2015-01, effective for fiscal years beginning after December 15, 2015. As Deloitte's summary of the update eliminating extraordinary items explains, companies no longer segregate such items, present them net of tax below continuing operations, or disclose their per-share effect. What remains is the guidance on items that are unusual in nature or occur infrequently: they stay within continuing operations, presented as a separate line on the income statement or disclosed in the notes.

Unusual or infrequently occurring item

An event or transaction that is unusual in nature, infrequent in occurrence, or both, such as a major restructuring, a large litigation settlement or a gain on selling a business. Under US GAAP these items remain within income from continuing operations and are presented separately or disclosed in the notes, with no net-of-tax subtotal.

The practical result is that one-time items sit inside operating income or just below it, mixed with everything else. Companies that want to show earnings without them do so outside the financial statements, in non-GAAP measures such as adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and adjusted earnings per share (EPS), where the company itself decides what to exclude. One category gets more formal treatment: businesses that are sold or held for sale and represent a strategic shift are removed from continuing operations entirely, as described in discontinued operations.

Most adjustments fall into a handful of families, each with a different claim to being non-recurring:

Impairments deserve a note of their own because they are often the largest items and the most mechanical to remove. They arise from tests that compare an asset's carrying amount with what it can still generate, explained in goodwill and goodwill impairment and impairment of long-lived assets, and they tend to arrive when a business is underperforming, so a large impairment is also a signal about future earnings, not only a charge against past ones.

Normalized earnings

A company's earnings adjusted to remove items that are not expected to recur, such as restructuring charges, impairments, gains on disposals and litigation settlements, so that they reflect the ongoing profitability of the business. Normalized figures are the base for valuation multiples and debt sizing.

Take a company with $2,000 million of revenue that, in the same year, ran a restructuring program, wrote down goodwill from an earlier acquisition, paid advisers on a small deal and sold a surplus building at a gain. All four items sit inside reported operating income. Normalizing removes each of them to show what the business earns in an ordinary year:

The adjustments add $81 million, about 37% of reported operating income. At an enterprise value (EV) to EBIT (earnings before interest and taxes) multiple of 10x, accepting them all would add $810 million of value, which is why each one is argued over in a sale process.

Three questions separate genuine one-time items from recurring costs with a one-time label.

Will It Recur?

Frequency is the most important test. A company that records restructuring charges every year is running a permanent reorganization, and the charges are part of its cost of doing business. Impairments can follow the same pattern. Kraft Heinz recorded large impairment charges in several years from 2018 onward; its second-quarter 2020 results included non-cash goodwill impairments of about $1.8 billion and intangible asset impairments of about $1.1 billion, which its adjusted EBITDA and adjusted EPS excluded as impairment losses. Each charge was non-cash and arguably unusual on its own; together, they recorded a long decline in the value of businesses and brands the company had paid for.

Securities and Exchange Commission (SEC) rules address the labeling directly. Deloitte's guide to non-GAAP performance measure prohibitions explains that a company may not adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual when the charge is reasonably likely to recur within two years or a similar charge occurred within the prior two years. The prohibition is based on the description: the company may still adjust for the item, but it may not call it non-recurring.

Is It Part of the Operating Business?

A gain on selling a building is one-time for a manufacturer, but selling used assets is routine for an equipment rental company, and the gains are part of how it earns money. Integration costs after an acquisition are one-time for a company that rarely buys, but recurring for a serial acquirer whose strategy is buying and integrating. The same item can belong in normalized earnings for one company and outside them for another.

Does It Reflect a Real Economic Cost?

Non-cash charges are often removed on the grounds that they do not affect cash. That is true in the period, but an impairment records that a past investment, usually paid in cash or shares, has lost value. Removing every impairment from earnings while capitalizing every acquisition at full price means the cost of poor deals never appears anywhere in normalized performance. Bankers often remove impairments from normalized EBITDA, which is reasonable for valuing the business as it stands, while still treating a history of impairments as evidence about management's capital allocation.

One-time items rarely line up with cash. A restructuring charge is recognized when the obligation arises, but severance and contract termination payments are often made over the following year or two, so the cash cost of a program lands in later periods. The restructuring reserve roll-forward in the notes shows the opening liability, new charges, cash payments and closing liability, and is the best guide to how much cash a past restructuring will still consume. Impairments, by contrast, involve no cash at all, and are added back in operating cash flow.

Taxes need the same care. Most one-time charges are tax-deductible and most gains are taxable, so normalized net income should remove each item after its tax effect, not before. Goodwill impairments are an exception: they are usually not deductible, so they reduce reported net income by their full pre-tax amount, and removing them adds back the full amount.

Normalized earnings feed every part of banking analysis. In valuation, comparable companies must be normalized on the same basis before multiples are compared, as the Valuation guide explains in its article on non-recurring items and one-time charges. In a sale, the buyer's diligence tests each adjustment in the seller's adjusted EBITDA, which is the core of a quality of earnings report. In financing, credit agreements define which one-time items may be added back to covenant EBITDA, often with caps. In each setting, the defensible position is the same: remove items that are genuinely unusual, keep items that recur, and disclose every adjustment so that anyone relying on the number can see how it was built.