Tuesday, 30 May 2017

Non-operating items, Provisions and Reserves

Strict accounting rules exist for dealing with nonoperating expenses and one-time charges.

For determining value, however, these entries and the financial statements require adjustments.

These entries provide relevant information concerning past performance and future cash flows.

Assessing impact of nonoperating charges

A three-step process can aid in assessing the impact of nonoperating charges:

  1. reorganize the income statement into operating and nonoperating items, 
  2. search the notes for embedded one-time items, and 
  3. analyze each extraordinary item for its impact on future operations.

Noncash expenses usually

  • lower an asset or 
  • increase a provision account in the liabilities.

In evaluating a business, there are four types of provisions:

  1. ongoing operating provisions,
  2. long-term operating provisions,
  3. non-operating restructuring provisions, and
  4. provisions created to smooth income.

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