Presentation Of Nonrecurring Items: Theory, Institution And Practice

Earnings is the main index to measure the profitability and economic efficiency of one company's overall performance. It plays an important role in economic decision-making. In China, both the Ministry of Finance and China Securities Regulatory Commission (CSRC) adopt corporate accounting standards and disclosure rules to control accounting information of listed companies separately. Ministry of Finance focuses on the recognition,measurement, recording and reporting of accounting information, while CSRC focuses on the disclosure of corporate information. In 1999 CSRC began to require listed companies disclose nonrecurring items and net profit excluding nonrecurring items in annual reports. This means CSRC try to re-classify earnings for constraining behavior of listed companies, in addition to accounting standards.In fact, the introduction of nonrecurring items concept played an important role at least in the following two aspects. First, it restrained listed companies from using nonrecurring gain or loss to manipulate profits and encouraged listed companies to concentrate on improving core competitive power. Second, it provided more objective and fair performance evaluation on listed companies' profitability. It is an important index in the securities regulatory policies, such as the initial public offering, issuing new shares and the abolition of special treatment. With the continuous development of capital markets and stakeholder, people come to realize that the various components of earnings are not the same level to reflect company's current and future economic growth. In particular, since the implementation of China's new accounting standards in 2007, balance sheet view and comprehensive income concept have been highlighted in financial reports, resulting revenue items more complex. There are different standards on revenue classification, such as accrued Profits and cash flow according to capital base. And it also can be classified as recurring items and nonrecurring items in accordance with different persistence. There were many valuable academic research productions in former division, but the latter point was not widespread studied.The author selects nonrecurring gain and loss to study, through the deconstruction of the surplus. Contents and main conclusions are as follows:1. This paper illustrates the different points of Current Operating Concept of Income and All-Inclusive Concept of Income, and then analyzes the main demand and supply of nonrecurring items respectively. It outlines the whole systematic framework to demonstrate the presentation process of nonrecurring items, including rule-making areas, implementation aspect, supervision and punishment aspects.2. This thesis reviews the regulations related to nonrecurring items in the U.S. GAAP and International Accounting Standards, and summarizes China's policy evolution in the past ten years. The results show that the relevant provisions of the U.S. GAAP and IAS both reflect All-Inclusive Concept of Income, in which Current Operating Concept of Income has also been expressed partly. Such institutional arrangements are consistent with relatively stable operating environment at that time. With the diversification of non-traditional revenue sources and increased use of derivative financial instruments, business activities have became more complex since the 21st century came. So FASB and IASB tend to choose a more cautious approach to reduce companies'scope in determining the extraordinary gain or loss.3. Using 2004-2008 Shanghai and Shenzhen A-share listed companies'data, this paper investigates the real implementation of nonrecurring profit and loss and conducts industry analysis and structural analysis of nonrecurring items. It obtains the following main findings:(1) The sum of nonrecurring items shows that the proportions of nonrecurring profit and loss account for net profit are increasing in recent years. It is necessary to be concerned about such phenomenon. (2) Though detailed structural analysis for nonrecurring items, we find that debt restructuring, fixed assets disposal, government grants and non-operating items are major items from the frequency and amount. Regulators should strengthen the supervision on these major projects. (3) In the industry analysis, optional consumer goods industry, information technology and health care industry are proved to be the three focus industries4. Combined with the implementation of listed companies in the data analysis, the problems identified are discussed from the rule-making, supervision and punishment.This paper makes contributions to the literatures on the presentation of nonrecurring items in the following three dimensions:1. Constructs the systematic framework of presentation of nonrecurring items from the perspective of process and function for the first time.2. Expands the traditional interpretation on the motivation of utilizing nonrecurring gains and loss among listed companies.3. Analyzes the composition and industry distribution characteristics of nonrecurring items statistically and provides the actual evidence and important instructions on monitoring and evaluation for nonrecurring items.