1. Lecture 3 Core and unusual items
Items with no predictive relevance
Three considerations for forecasting:
The time series of a particular item
Our understanding of the nature of the item
Availability of information in the annual report, including (for operating items) the segmental report
Comparison distorting

2. Operating items Unusual items often footnote items to
“other operating revenues”
“other operating expenses”
Net positive and negative items of the same nature
“exchange rate gains” and “exchange rate losses”
Classify as unusual only if the distribution of the item among segments is known

3. Operating items Assets/liabilities at historical cost
Exchange rate gains and losses
Unusual items
Restructuring costs
Core items
Gains and losses on sales of assets and operations
Write-downs of assets and reversals of write-downs

4. Operating items Assets measured at fair value
Investment property
(Land and buildings used to earn rentals and/or capital appreciation)
Gains and losses on sale of assets
Revaluations
Unusual items
Forecasts: fair value x forecasted rate of inflation

5. Financial items Assets / liabilities at cost
Gains and losses on sale
Write-downs and reversals of write-downs
Core items
Exchange rate gains and losses
Unusual items

6. Financial items Assets at fair value
Gains and losses on sale
Revaluations (recognised in the income statement)
Core items

7. Discontinued operations
Low predictive relevance, but
Accounting ratios would be distorted, unless the corresponding assets were not also classified as ”unusual”
Core items
Segmental report used to handle the issue

8. Majority and minority shareholders
Equity
Shareholders’ equity (attributable to the shareholders of the parent company)
Minority interest (attributable to the minority shareholders of the subsidiaries)
Net income
Net income attributable to majority shareholders
Minority income

9. Changes in shareholders’ equity
Beginning shareholders’ equity
Net dividends (to maj. shareholders)
+ Net income (of maj. shareholders)
Dirty surplus (of maj. shareholders)
= Ending shareholders’ equity

10. Net dividends Net dividends =
Dividends (to shareholders of the parent)
+ Share repurchases
- New issues of shares
± Other shareholder related transactions
e.g. equity component of convertible bonds
conversion of convertible bonds

11. Dirty surplus Dirty surplus =
deviations from the CSR (clean surplus relationship)
The valuation models are based on CSR,
hence we need an income measure consistent with the CSR

12. Comprehensive income Comprehensive income = Net income ± Dirty surplus
Change in shareholders’ equity according to the CSR
Beginning shareholders’ equity
Net dividends
+ Comprehensive income
= Ending shareholders’ equity

13. Examples of dirty surplus
“total change in net asset value reported directly against equity, excluding transactions involving company shareholders”
Translation differences
Exchange rate gains and losses on net assets of foreign subsidiaries
(Note: exchange rate gains and losses on claims and liabilities in foreign currencies are recognized in the income statement – not dirty surplus)
Changes in fair value of “available for sale financial assets”
Value changes recognized directly in equity

14. Examples of dirty surplus
Changes in accounting principles
Recognized “retrospectively”
Opening balance of shareholders’ equity (for the oldest comparative year) is adjusted
Special problem
Implementation of IAS/IFRS in 2005

15. Change in minority interest
Beginning minority interest
Net dividends to minority owners
+ Minority income
Dirty surplus (attributable to minority owners)
= Ending minority interest