One time expenses

What Are One-Time Expenses?

One-time expenses, also known as non-recurring charges or extraordinary items (historically), are costs incurred by a business that are not expected to happen again in the normal course of its operations within a foreseeable future. These expenses are distinct from routine operational expenditures and are often significant, impacting a company's financial statements for the period in which they occur. They belong to the broader financial category of financial accounting and are crucial for accurately assessing a company's underlying performance.

These unique costs can arise from a variety of unforeseen or strategic events, such as large legal settlements, asset write-downs, or restructuring efforts. While they affect a company's profitability in the period they are recognized, they are generally separated or highlighted to give stakeholders a clearer picture of ongoing core revenue and earnings.

History and Origin

The concept of distinguishing one-time expenses from regular operating costs has a long history in accounting, evolving to provide more transparent financial reporting. Historically, U.S. Generally Accepted Accounting Principles (GAAP) used a specific classification called "extraordinary items" for gains or losses that were both "unusual in nature" and "infrequent in occurrence." The Accounting Principles Board (APB), a predecessor to the Financial Accounting Standards Board (FASB), established this classification with APB Opinion No. 30 in 1973, setting criteria for their treatment in the income statement.¹⁰

The intent was to clearly separate these unusual events from a company's core operating results, helping users of financial statements understand which items were unrelated to a business's normal activities.⁹ Examples of what might have been classified as an extraordinary item included losses from rare natural disasters or expropriation of assets by a foreign government.⁸

However, over time, the application of the "extraordinary items" designation became less frequent and often led to confusion or inconsistencies.⁷ Consequently, in 2015, the FASB eliminated the formal concept of "extraordinary items" from GAAP, aligning U.S. standards more closely with International Financial Reporting Standards (IFRS), which had never used the designation.⁶,⁵ While the specific reporting line item was removed, companies are still required to report and disclose unusual or infrequent gains and losses, but they are now typically included within continuing operations or as separate line items, depending on their nature and materiality.

Key Takeaways

• One-time expenses are significant costs incurred by a business that are not expected to recur regularly.
• They are distinct from everyday operating costs and capital investments.
• Historically, some one-time expenses were classified as "extraordinary items" under U.S. GAAP, a classification later eliminated by the FASB in 2015.
• These expenses are crucial for analysts and investors to understand a company's sustainable profitability.
• While impacting reported net income, they are often excluded from adjusted financial measures to show core performance.

Interpreting One-Time Expenses

Interpreting one-time expenses requires careful analysis, as they can significantly skew a company's reported net income for a given period. Financial analysts and investors often scrutinize these charges to determine their true impact on a company's long-term financial health and future earnings potential. When a company reports substantial one-time expenses, it's important to understand the underlying event that caused them.

For example, a large restructuring charge might indicate a company is streamlining operations, which could lead to improved efficiency in the future, even if it hurts current period earnings. Conversely, a large legal settlement might signal underlying operational issues or regulatory non-compliance that could pose ongoing risks. Analysts often adjust reported earnings to exclude one-time expenses, creating what are known as non-GAAP financial measures, to better compare performance across periods and with competitors.

Hypothetical Example

Consider "Alpha Tech Inc.," a software company, that in 2024 decides to consolidate its research and development facilities from three locations to one. This strategic move involves significant costs associated with breaking leases, relocating employees, and decommissioning old equipment.

The company incurs the following one-time expenses:

• Lease termination fees: $5,000,000
• Employee severance packages: $3,000,000
• Equipment decommissioning and moving costs: $1,500,000
• Total one-time expenses: $9,500,000

In addition to these, Alpha Tech Inc. has its regular annual operating expenses, such as salaries, marketing, and office supplies, which total $50,000,000 for the year, and generated $70,000,000 in revenue.

If these one-time expenses were not separated, the company's reported profit for the year would be considerably lower, potentially misleading investors about its ongoing operational profitability. By highlighting these one-time charges, the company provides a more transparent view of its core business performance, allowing stakeholders to understand that a significant portion of the period's expenses are non-recurring.

Practical Applications

One-time expenses appear in various real-world financial contexts, impacting how companies are valued, regulated, and analyzed. In corporate finance, these charges are common during significant business events such as mergers and acquisitions, divestitures, or corporate bankruptcies. For instance, when a company undergoes a major discontinued operation, such as selling off a non-core business segment, it typically incurs one-time expenses related to the disposal, including asset write-downs, severance costs for affected employees, and legal fees.⁴

Regulators, like the U.S. Securities and Exchange Commission (SEC), pay close attention to how companies present these non-recurring items, especially when they are used to adjust reported earnings. The SEC has provided guidance on the use of non-GAAP financial measures, cautioning against labeling items as "non-recurring, infrequent or unusual" if similar charges have occurred or are likely to occur within a two-year period.³ This scrutiny aims to prevent companies from misrepresenting their sustained profitability by continually excluding various expenses as "one-time."

Furthermore, tax authorities, such as the Internal Revenue Service (IRS), have specific rules regarding the deductibility of various business expenses, including certain one-time costs. While many ordinary and necessary business expenses are deductible, the classification and timing of certain large, non-recurring expenses can have significant implications for a company's taxable income and overall tax liability.²

Limitations and Criticisms

While distinguishing one-time expenses aims to provide clarity, their reporting and interpretation come with limitations and criticisms. A primary concern is that companies might manipulate the classification of expenses to present a more favorable picture of their recurring profitability. By labeling recurring costs as "one-time," a company could artificially inflate its adjusted earnings, leading to an overestimation of its core operational strength.

Another limitation stems from the subjective nature of what constitutes "one-time." Events initially deemed infrequent might, over time, recur, blurring the line between truly extraordinary and simply irregular events. This ambiguity can lead to inconsistencies in financial reporting across different companies or even within the same company over different periods. Critics also point out that even if an expense is truly non-recurring, its impact on a company's cash flow and overall financial health is real and should not be completely discounted when assessing performance. Excluding these costs can make it harder for investors to assess the true volatility of a company's earnings.

The elimination of the "extraordinary items" classification under Generally Accepted Accounting Principles (GAAP) in 2015 was partly a response to these criticisms, as the criteria for what qualified as "extraordinary" were often difficult to apply consistently.¹ While companies still disclose significant unusual items, they are now generally integrated into income from continuing operations, requiring users of financial statements to meticulously review disclosures to understand the nature and impact of these non-recurring events.

One-Time Expenses vs. Recurring Expenses

The fundamental difference between one-time expenses and recurring expenses lies in their predictability and frequency.

While one-time expenses represent significant outlays that affect a company's bottom line in a given period, they are distinct from the consistent, ongoing costs that define a business's operational structure. Understanding this distinction is crucial for investors and analysts to accurately gauge a company's sustainable earnings and future prospects, differentiating between temporary financial impacts and ongoing operational performance.

FAQs

Why are one-time expenses important for investors?

One-time expenses are important because they can significantly distort a company's reported earnings per share (EPS) for a particular period. By identifying these non-recurring costs, investors can gain a clearer understanding of a company's underlying, sustainable profitability from its core operations, which is often a better indicator of future performance.

How do auditors verify one-time expenses?

Auditors examine one-time expenses closely to ensure they are properly classified and disclosed. They verify that the expenses are indeed non-recurring and supported by appropriate documentation. This involves scrutinizing the nature of the transaction, its unusualness, and the likelihood of its recurrence, even though the formal "extraordinary items" classification has been removed from GAAP.

Can one-time expenses be good for a company?

Sometimes, yes. While they reduce current period profit, one-time expenses can be associated with strategic initiatives designed to improve long-term profitability. For example, a large restructuring charge might be incurred to streamline operations, reduce future costs, or dispose of underperforming assets, ultimately leading to a stronger and more efficient company. Similarly, costs for merging with another company can be one-time but lead to significant future growth.

Are one-time expenses always tax-deductible?

Many one-time expenses that are considered "ordinary and necessary" for a business may be tax-deductible. However, the specific deductibility depends on their nature and how they align with tax laws. For instance, certain capital expenditures are not fully deductible in the year incurred but are depreciated over time. It is always advisable to consult tax professionals for specific guidance.