What are the Non-Operating Expenses?
Non-operating expenses, also known as non-recurring items, are the expenses which not related to the principal activities of a business and are usually stated on the company’s income statement for the period below the results from the continuing operations.
The person analyzing the financial health of the company generally removes non-operating revenues and expenses to examine the company’s year over year performance correctly.
Most Common Examples of Non-Operating Expenses (list)
- Lawsuit Settlements
- Losses from Investments
- Restructuring CostsRestructuring CostsRestructuring Cost is the one-time expense incurred by the company in the process of reorganizing its business operations. It is done to improve the long term profitability and working efficiency. This expenditure is treated as the non-operating expenses in the financial statements.
- Gains/Losses on Sale of Subsidiary/Assets
- Writedown of InventoryWritedown Of InventoryInventory Write-Down refers to decreasing the value of an inventory due to economic or valuation reasons. When the inventory loses some of its value due to damaged or stolen goods, the management devalues it & reduces the reported value from the Balance Sheet. / Receivables
- Damages Caused to Fire
- expropriation of the company’s property
- Losses as a result of natural calamities like earthquake, floods or Tornadoes
- Gain or loss from early retirement of debt
- Intangible Assets Writeoff
- Discontinued Operations
- Changes in Accounting PrinciplesAccounting PrinciplesAccounting principles are the set guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while recording and presenting the financial information in the books of accounts.
Let’s see some examples, Case Studies of non – operating expenses to understand it better.
- Company A ltd is in the business of providing the telecom services to the customer. During the year, company A sells one of its buildings at $ 100,000 loss, resulting in the expense for it. This loss will be treated as the non – operating expense as the same does not arise because of the core operations of the company. Also, during the same period company paid the one-time insurance premium at the beginning of the year for the whole year to one of the insurance companies to cover various types of the loss that could arise from different types of unforeseen events like flood, theft, earthquake, etc. This amount paid for the insurance premium will also be treated as the non – operating expense as the same does not arise because of the core operations of the company. All these non – operating expenses of the company will be clubbed together. They will be shown under the head non-operating income in the income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements. of the company below the results from the continuing operations.
- There is a company that deals in the international markets for buying and selling its products. These companies conduct transactions using foreign currency, so there are chances of the exchange rate loss or currency loss to these companies. These type of losses happens when there is wide currency fluctuates in the market, which is unfavorable for the company. So this leads to the currency loss to the company. These exchange rate loss or currency loss are treated as the non-operating expenses of the company and will be clubbed together and will be shown under the head non-operating income in the income statement of the company below the results from the continuing operations.
- The person analyzing the financial health of the company generally calculates the non-operating expenses of the company and deducts the same from the income of the company from its operation in order to examine the company’s performance and estimating its maximum potential earnings.
- When the non-expenses are calculated separately and shown separately in the income statement of the company, then it presents the clear, detailed picture of the company to all its stakeholders and helps to assess the actual performance of the business in a far better way and if any problem with respect to such nonoperating expenses occurs then the same could also be brought in the notice of the management of the company.
- There are some expenses which sometimes creates confusion in the mind of the person bifurcating the expense that whether it should be treated as the operating and non-operating costs. So, the person doing bifurcation of the expense should have proper knowledge about the expenses which are operating and expenses which are nonoperating for the company then only it is worth to bifurcate the same.
- One expense can be non-operating for one company whereas the same could be operating for the other company. So, there are no standard criteria for its bifurcation. It requires the time and effort of the person for the proper segregation of the expenses.
- They are the expenses that occur outside of the day to day activities of the company.
- Once the total of all the items of the non-operating head is derived, it will be deducted from the total of the operation’s income to get the company’s net earnings during that period.
- These expenses of the company also include the one-time expenses incurred or the unusual costs.
- When the non-expenses are calculated separately and shown separately in the income statement of the company, then it presents a clear, detailed picture of the company to all its stakeholders.
As some of the events are uncertain, it is completely possible for companies that run a sound business to incur unusual expenses. These expenses are generally treated as nonoperating expenses as these expenses do not arise because of the core operations of the company. When non-operating expenses are shown separately on its income statement, it allows the managers, investors and the other stakeholders of the company to assess the actual performance of the business in a far better way and if any problem with respect to such nonoperating expenses occurs then the same could also be brought in the notice of the management of the company so that necessary corrective actions could be taken on time.
This article has been a guide to what are non operating expenses, and it’s meaning. Here we discuss the list of most common examples of non-operating expenses along with advantages and disadvantages. You can learn more about financing from the following articles –