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Non-recurring and non-operating items

Accounting standards require or enable companies to present income and expense items that are not likely to recur in the future separately from those which are expected to continue in the future.

Discontinued operations

Both IFRS and US GAAP require companies to present the effects of discontinued operations separately. A discontinued operation can be broadly described as a business, or a component thereof, that the organization has already discontinued or plans to discontinue.

IFRSs require material and/or relevant items to be disclosed separately. Under US GAAP, unusual or infrequent items are included in continuing operations but disclosed separately. Such bifurcation is useful is an assessment of what constitutes a company’s core recurring operating expenses and which items are of unusual or infrequent nature, such as gains from asset disposals, unusual receipts from winning a legal case, restructuring costs, etc.

Impact of changes in accounting estimates and policies

Changes in accounting policies result either from new standards or from adoption by the entity of an alternative method allowed by the existing standards. Many new standards require companies to comply with the standard prospectively (for future periods), however, some many require retrospective (historical) adjustment.

If a company changes an accounting policy itself, it is required to restate prior year comparative results to present the financial statements as if the new policy has been applied all along. In contrast, changes in accounting estimates are always adjusted prospectively. A restatement is also required when a material error related to prior period financial statements is discovered.

Non-operating items

IFRS provides no guidance on what an operating activity is. However, under US GAAP, operating activities generally involve producing and delivering goods, and providing services. These include all transactions not included in investing or financing activities.

The context is important because different companies have different operating activities. For example, a non-financial company would present any interest income as non-operating, but a bank would show it as operating, and so on. Companies typically show interest expense separately so that analysts can compare it to the company’s debt obligation.

IFRS allows interest and dividends received as either operating or investing, but US GAAP requires them to be presented as operating in nature. Similarly, UG GAAP interest paid is operating, while dividends paid are financing, but under IFRS interest and dividends paid are either operating or financing in nature.

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