Adjusted Accounts
Exceptional costs and non cash impairments are annual report's favourite sections when the business is in trouble but wants to report a profit.

Sometimes exceptionals are genuinely exceptional and sometimes this year's exceptionals are different from last year's exceptionals which are different from year before that's exceptionals.

All companies are required to file accounts adhering to specific financial reporting standards but they are also free to report in addition using pretty much any accounting practices that they feel appropriate.

At first glance this seems quite sensible, a particular business may have a set of special circumstances that can be better reported using different logic.

Where I get concerned is when companies report massively different figures when using these two standards or when they focus heavily on their own internal standards and downplay the figures from the regulatory standards.

Adjustment Can Be Okay But It Does Hide Things
The table below comes from Non Standard Finance's accounts and it is one of the first things that you see in the 2018 Full Year's Results Statement.

Year to 31 December 2018
% change
Normalised revenue 166,502 119,756 +39%
Reported revenue 158,824 107,771 +47%
Normalised operating profit 35,876 23,684 +51%
Reported operating profit 19,517 3,802 +413%
Normalised profit before tax 14,769 13,203 +12%
Reported (loss) before tax (1,590) (13,021) +88%
Normalised profit after tax 11,572 10,890 +6%
Reported (loss) after tax (1,679) (10,335) +84%
Normalised earnings per share 3.70p 3.44p +8%
Reported (loss) per share (0.54)p (3.26)p +84%
Full year dividend per share 2.60p 2.20p +18%

In these results the Normalised figures are NSF's own, like all adjusted figures the intent is to see the true underlying performance of the business.

Given the variance in profit/loss, a £11.6 million profit or a £1.7 million loss you may be able to see why I have such worries.

Typically adjusted figures might be Profit defined as "Profit excluding the cost of exceptional items," that sort of makes sense we had a great year but had to pay to repair flood damage, but the flood damage still existed and had to be paid for.

Once companies get into the habit of doing this you can sometimes see Adjusted Profits always being positive numbers as more and more things become defined as Exceptional Items hiding the fact that they are not actually making a profit.

Earnings Before Interest, Tax, Depreciation and Amortisation is a good way to see how a business is trading especially when comparing it with its rivals and a favourite of big take overs.

The problem is that the items omitted still need to be paid, so reports making a big deal out of this measure can mean that the company can't afford its debts or to replace equipment necessary to operate the business.

If things are going really bad EBITDA will also be before exceptional costs.

This measure can be useful especially if used with good intent in the same way as 0-60mph tells you something about the performance of a car.

Non Cash Impairments
Something that was previously reported as being worth x is now worth y.

Generally this means that someone overpaid for something in the past and now the accounts need to reflect this. If these were decisions of previous management then this may not be a major concern, if the management is substantially the same then caution may be needed.

Exceptional Costs
Something that meant real money had to be spent rather than an accounting tweak but probably wasn't expected and should not recur.

Some exceptional costs really are exceptional, in May 2019 a US fighter jet crashed into a factory, this probably incurred costs for the factory owner and they really were exceptional.

With failing companies the costs of the failed aspects of the business are reported as exceptional costs and next year there will be a different set of exceptional costs and these are often associated with Revaluation of ......., Staff costs, Consultant cost.


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