Operating versus Non-operating Items

When assessing a company’s current or potential future financial performance, it is important to consider the effects of both operating and non-operating components of the income statement. For example, a company that may appear to be profitable based on the results of its primary business activities could also be facing huge losses due to non-operating expenses.

Non-operating components on the income statement include revenue and expense items that were not generated during the regular course of business operations. Due to the material nature of non-operating items, they are always reported exclusively i.e. separate from operating items in a company’s financial statements.

US GAAP vs. IFRS

Under US GAAP, operating activities include all transactions and other events which are not defined as investing or financing activities. Operating activities generally involve the production and delivery of goods or provision of services.

IFRS, however, does not define operating activities. Companies that choose to report operating income or the results of operating activities in their financial reports must ensure that these are activities that qualify to be called operating activities.

Non-financial vs. Financial Services Companies

For non-financial service companies, non-operating income that is disclosed separately on the income statement or in the notes to the financial statements includes amounts that are earned through investing activities. Interest expense on debt securities, including amortization of any discount or premium, is reported as a non-operating item on the income statement. In this case, the interest expense is related to the amount of borrowings and is usually described in the notes to the financial statements.

For financial service companies, interest, income, and expense are typically reported as components of operating activities.

Question

Which of the following statements is accurate?

1. Under IFRS, operating activities include all transactions and other events that are not defined as investing or financing activities.
2. Non-operating items include revenue and expense items that are generated during the regular course of business operations.
3. Non-operating items are always reported exclusively i.e.  separate from operating items in a company’s financial statements.

Solution

The correct answer is C.

A is incorrect because IFRS does not provide a definition for operating activities. The definition given is that provided by US GAAP.

B is incorrect because non-operating items include revenue and expense items that are not generated during the regular course of business operations.