Wednesday, February 08, 2006

Excluding One-Time Expenses

The phrase "excluding one-time expenses" is somewhat notorious and controversial in the annals of generally accepted accounting practices (GAAP). Sometimes a business will experience something extraordinary, for example, a terrorist blowing up its primary manufacturing plant. The company will incur considerable expense recovering from this extraordinary event, and there are those who say that a proper picture of the business's profit and loss should exclude those extraordinary expenses. After all, if a car manufacturer had a major plant blown up, and the costs of that were included in the bottom line, it would be hard to discern through that whether they were doing a profitable job of making and selling cars as an ongoing business. Others argue that anything that happens to the business is part of the business.

Some years ago, GAAP allowed "extraordinary expenses" to be excluded from P&L. However, many companies came to be rather liberal with their interpretation of what was "extraordinary". Extraordinary came to mean not just a terrorist attack, but a strike, a lawsuit, restructuring costs. Now a case can be made that any of those things may be extraordinary, but when they happen year after year after year, credulity becomes strained. How many years in a row can you have "one-time" expenses? I forget exactly how many years in a row Motorola did that, before the SEC came down on them (and everyone else - they were far from alone). These days, I believe, if a company has extraordinary expenses, the income statement is presented both ways - with and without. This is the most transparent.

All of this crossed my mind as I heard on the radio that President Bush has presented Congress with the fifth post 9/11 budget, and as with each of the previous years, the budget does not include expenses for the "Global War on Terror". The President plans to submit those expenses later as a "supplemental" (that's Congress-speak for "extraordinary one-time expenses"). I was glad to hear that at least some Senators were questioning how we could have an "emergency appropriation" for the fifth year in a row, and probably at least as many years into the foreseeable future. How exactly is that an "emergency"? Can the SEC please crack down on the White House? Not that this administration has given us any confidence that they might approach fiscal sanity, but such credulity-straining gimmickry intended to conjure the facsimile of balancing a budget only undermines confidence.

Correction (2/9): I had written "balance sheet" when I should have said "income statement". Thanks, Kip. I'm not an accountant (nor a lawyer nor a doctor nor a theologian), I just enjoy playing one on the web!

1 comment:

KipEsquire said...

"if a company has extraordinary expenses, the balance sheet is presented both ways"

Good post, but extraordinary items appear on the income statement, not the balance sheet.

Sorry to be so OCD. ;-)