What are non-operating expenses?

Companies incur expenses to run their daily operations and generate revenue. Such expenses are called operating expenses. But the company also incurs expenses that are outside its main line of operations. These expenses are incidental or peripheral to the company.

Borrowing money is the outside activity for a merchandising business, hence interest payment is the non-operating expense.

Non-operating expenses are the expenses incurred in the company that is not directly involved in the operational activities or main business activities of the company often reported on the income statement after the Income from Operations heading under Other expenses. Such expenses are usually non-recurring and don’t account for the daily expenses of the company.

Non-operating expenses include the financial obligations not related to core operations.

The examples of such expenses are:

  1. Legal fees
  2. Interest costs and other financing costs
  3. Loss from sale of assets
  4. Losses from exchange fluctuations
  5. Re-organization costs
  6. Impairment loss
  7. Loss from derivative instruments
  8. Obsolete inventory costs
  9. Lawsuit settlement expenses

Non-operating expenses are not considered while calculating the company’s profit. It is shown as a bottom-line item in the income statement.

Calculation of non-operating income:

Presentation of non-operating income in the income statement of the company:

Sinra Inc

Income statement

For the year ended December 31, 2020

In the income statement, interest expenses, legal fees, loss from the sale of assets fall under non-operating expenses. Non-operating expenses are usually deducted from EBITDA on an income statement.

It is depicted as a bottom-line item on the income statement and recorded just below the results from the continuous operations.

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Non-recurring events give rise to non-operating losses hence, they are reported on a company’s income statement. They are shown separately from normal earnings so that analysts and investors can see how the business performed over a specific time period.

Example:

Assuming after subtracting the cost of goods sold and all of the operating expenses from the sales revenue, a company reported an operating income of $1,500,000 for one year. In addition to running its core business, the company also made some investments, which brought in $500,000 in dividends and $200,000 in interest income.

During the year, the company paid $ 600,000 interest for its previous financing year and sold a piece of land at a loss of $ 100,000 Also, it was sued and was charged $ 150,000.

The company’s income from dividends, interest income, and interest expenses are all non-operating gains or losses. Overall, the company incurred a net non-operating loss of $ 150,000 which is shown below.

Dividend Income500,000
Interest income200,000
Interest expenses-600,000
Loss on sale of land-150,000
Costs of litigation-100,000
Non-operating income (loss)(150,000)

In the technical sense in the above table, interest expenses, loss on the sale of land, and costs of litigation are non-operating expenses. The classification of items as non-operating expenses/income depends on the nature of the business being carried out.

For financial companies, interest income/expenses are treated as operating income/expenses while the rest of other companies treat it as operating income/expenses.

Accounting Manipulation:

The non-recurring nature of non-operating expenses and incomes provide scope for accounting manipulation. Non-operating income may be inflated to compensate for losses on operations. It can also account for incorrect operating income by including gains from unrelated activities.

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A sudden increase in profit is more likely to be contributed by unrelated activities and can be non-operating in nature.

Non-operating incomes and expenses are excluded from the calculation of Earnings Per Share (EPS) as not being part of the company’s normal course of operations.

Non-recurring events can inflate/deflate the earnings of the company hence, depict the untrue financial position of the company. Write-offs or write-downs may be considered non-operating expenses if they occur due to one-time sudden events like a natural disaster, downturns of the economic conditions.