Non-Operating Expenses Hidden in Operating Earnings, a NOPAT Adjustment

Non-operating expenses, such as asset write-downs, which I discussed in a separate post, are special items and one-time charges that are not reported on the face of the income statement, and are instead hidden in other line items. The most common types of hidden non-operating expenses are litigation charges, restructuring costs, amortization of acquired intangibles, some pension costs, and losses on asset sales. An example of a non-operating expense hidden in operating earnings is the $5 billion penalty that Meta Platforms paid as part of a settlement with the Federal Trade Commission (FTC) and which the company reported on page 22 of its 2019 10-K¹:

Academic research has investigated the persistence and predictability of these expenses, and, although nearly research found that year-on-year persistence and predictability was hard to discern, more recent research² has found that across many years, there is persistence of special items for firms with strong core profits. Simply, firms with strong core profits and which report a series of restructuring charges, for example, are likely to do so in future, as Meta Platforms’ has done in recent years, whereas firms with low core profitability, are unlikely to repeat the trick. Researchers believe this is because firms may shift operating items into special items in order to manage their earnings³. However, it is difficult to extend this research to any meaningful conclusions about individual companies.