Second of three-part series

Numbers behind ‘Others’ and ‘extraordinary items’

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Emeterio Sd. Perez

Emeterio Sd. Perez

REVENUES and net income are, generally, the two main considerations that guide investors in their choice of listed stocks. These are entries in financial filings that are filed quarterly and summed up by the end of the year into audited annual financial statements.

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As regulatory filings, financial reports are the only freely available clues to the profitability of listed companies.

In case of losses, the public stockholders may either choose to hold on to their stocks or cut their losses by selling.

Due Diligencer is not in a position to reverse one’s wrong choice of stocks. This piece is intended only to define “others” and “extraordinary income” presented in audited financial statements.

Annual financial statements, even if audited, do not contain all the information that public investors should know. But they serve as a reliable measure of the financial performance of listed companies.

‘Other expenses’
What are the entries after revenues and before the so-called “bottom line,” which is net profit? It is not as simple as a series of mathematical computations, such as deducting expenses from revenues equals net income before tax, minus provision for income tax, equals net profit.

There are more intervening entries between revenues and net profit.

There may be no question about expenses when these are detailed in the audited financial statement. Doubt arises only in case of “other expenses,” which external auditors explain in the footnotes with a similarly worded entry. Has anyone ever bothered to ask the management of listed companies why “others” as contained in cost and expenses reappears in the footnotes with no details at all?

What could be worse than when such “other” cost and expenses increased by 50 percent or more in 2013 from 2012 and then suddenly plunged by 60 percent in 2014? Was it because of political donations, 2013 being an election year, while the huge drop happened in 2014 when no elections were held?

There may be difficult-to-understand entries in a financial posting that public investors may not be aware of, and analyzing them does not consist simply of looking up for revenues at the top of the “Statement of Income” and looking down for net income.

‘Other charges’
In case of property companies that report more than a 36 percent increase in revenues, does this mean an equal increase in net income? Not necessarily. Despite such huge rise in revenues, the resulting net income could be less, at 29 percent as one listed company reported in its annual report.

Just imagine the puzzle or mystery behind the numbers in financial statements!

Who could possibly provide the missing amounts? When a listed company reports “other charges,” it should have come out with additional items under the classification instead of simply using the same, which is “others” under cost and expenses in the accompanying footnotes.

If political donations, which to laymen are “extraordinary expenses,” are not reflected in audited financial statements, here is an entry that should make up for said omission.

Unusual increase
“Extraordinary income” is not an everyday occurrence. It is a big boost to revenues and the resulting net income that public investors should decipher the factors for the unusual revenue increase. Could it be because of more business sales or the sale of an extraordinary item?

To illustrate: A company sells part of its holdings in a subsidiary for P2 billion. The amount is reported as a big revenue booster, which could even be much bigger than the seller’s regularly reported revenues. The P2-billion proceeds are treated as an extraordinary item and one of said company’s revenue sources.

On the downside, disposing of an asset could indicate that a company has weak finances or huge losses and is trying to recover and rid itself of a ballooning deficit. Going by the rule, the presence of additional paid-in capital or APIC would not in a way wipe out losses that are defined in audited financial statements as accumulated deficit.

Of course, a company would even be in a worse financial predicament when it reports deficit equity, which would mean it has more losses than its entire stockholders’ equity could possibly cover. This is a topic that requires a more comprehensive analysis in a future piece.

esdperez@gmail.com.

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