Updated for the 2026-2027 CFA® Level I curriculum.
Not every line on an income statement reflects how a company will perform next year. Some items come from outside the core business, and some will not happen again. CFA Level I asks you to classify these items correctly and understand how they affect analysis. This matters because sloppy classification leads to bad forecasts and wrong ratio comparisons.
Quick Answer
Non operating items on income statement are revenues and expenses outside a company's core business, such as interest income or investment gains. Non-recurring items are discontinued operations and unusual or infrequent items that analysts exclude when projecting future performance. Discontinued operations are reported net of tax below income from continuing operations. Policy changes generally apply retrospectively, subject to specific transition requirements and impracticability exceptions.
Key Takeaways
Operating items come from a company's core business. Non-operating items come from peripheral activities, such as interest income or gains on investments.
Non-recurring items include discontinued operations and unusual or infrequent items. Both affect reported net income but shouldn't be used to forecast future earnings.
Discontinued operations are reported net of tax in a separate line below income from continuing operations.
Unusual or infrequent items (not necessarily both) stay within continuing operations, usually reported pre-tax with separate disclosure.
Changes in accounting policies require retrospective application, restating prior-period statements as if the new policy had always been used.
Changes in accounting estimates apply prospectively and are never restated.
What You Need to Know for CFA Level I
The LOS asks you to describe the reporting treatment and analysis of these items, not just define them. Expect questions on classification and placement.
Know how to separate operating from non-operating items when judging a company's core profitability.
Know how discontinued operations and unusual or infrequent items appear on the income statement and why analysts adjust for them.
Know the boundary with expense recognition: this note covers classification and reporting of non-recurring items, not the capitalize-versus-expense decision.
Know that policy changes are retrospective while estimate changes are prospective. This distinction is heavily tested.
Watch for restructuring charges or impairments being mislabeled as discontinued operations when they do not meet the disposal criteria.
Operating vs. Non-Operating Items
Operating items come from a company's primary business activities. For a retailer, that's merchandise sales and the cost of goods sold. For a bank, that's interest income on loans.
Non-operating items come from activities outside the core business. Common examples include:
Non-Operating Item | Typical Example |
|---|---|
Interest income | Interest earned on cash holdings at a manufacturing company |
Interest expense | Cost of debt financing, for most non-financial firms |
Gains or losses on investments | Sale of marketable securities held outside core operations |
Foreign currency transaction gains or losses | Settlement or remeasurement effects reported in profit or loss; classification depends on the underlying item |
Analysts separate operating from non-operating income to identify different performance drivers. A manufacturer may have strong operating income but weak total income because of investment losses. That distinction helps assess its core operations, but operating income alone does not establish overall financial health or cash-generating capacity.
Non-Recurring Items on the Income Statement
Non-recurring items are events unlikely to repeat. CFA Level I focuses on two categories: discontinued operations and unusual or infrequent items.
Discontinued Operations
A discontinued operation is a component of a business that the company has disposed of, or has classified as held for sale, and that represents a strategic shift with a major effect on operations. Selling an entire product line or exiting a geographic segment usually qualifies. Selling a single piece of equipment does not.
Reporting rules:
Reported net of tax, in a separate line below income from continuing operations.
Includes both the operating results of the discontinued component and any gain or loss on disposal.
Prior-period income statements are reclassified so each year shown separates continuing and discontinued operations consistently.
Unusual or Infrequent Items
Items that are unusual, infrequent, or both remain within continuing operations unless another classification, such as discontinued operations, applies. US GAAP eliminated the separate "extraordinary item" category in 2015, so items that are both unusual and infrequent no longer get special treatment beyond disclosure. Common examples include restructuring charges, asset impairments, and gains or losses on asset sales.
These items are:
Reported pre-tax, as part of continuing operations.
Disclosed separately on the income statement or in the notes, so users can identify them.
Included in net income within continuing operations. Discontinued operations also enter net income, through their separate net-of-tax line.
Analysts typically remove unusual or infrequent items when calculating normalized earnings, even though they remain inside continuing operations on the reported statement.
Changes in Accounting Policies
A change in accounting policy happens when a company switches from one acceptable method to another, such as moving from FIFO to weighted average inventory costing. These changes generally require retrospective application, unless specific transition provisions or impracticability require another treatment: the company restates prior-period financial statements as if the new policy had always been in place.
This differs from a change in accounting estimate, such as revising an asset's useful life. Estimate changes apply prospectively, affecting only current and future periods, with no restatement of prior statements.
Type of Change | Application | Prior Statements Restated? |
|---|---|---|
Accounting policy change | Retrospective | Yes |
Accounting estimate change | Prospective | No |
Disclosure requirements for a policy change include the nature of the change, the reason for making it, and the effect on relevant financial statement line items.
Working Example
Setup: Harborline Industries operates two segments, Marine and Commercial. In 2025, management commits to selling the Marine segment, which meets the criteria for a discontinued operation. Marine segment results for 2025:
Operating loss before tax: $8 million
Loss on disposal before tax: $2 million
Tax rate: 25%
Separately, Harborline changes its inventory costing method from FIFO to weighted average for the Commercial segment, effective in 2025. The change decreases previously reported 2024 net income by $1.5 million after tax, and Harborline restates its 2024 financial statements accordingly.
Step 1: Combine discontinued operations results before tax.
8 million + (-2 million) = -10 million.
Step 2: Apply the tax rate.
10 million × (1 - 0.25) = -7.5 million.
Harborline reports a $7.5 million loss from discontinued operations, net of tax, as a separate line below income from continuing operations on the 2025 income statement.
Step 3: Apply the accounting policy change.
The inventory method change is retrospective. Harborline restates 2024 net income downward by $1.5 million and adjusts opening 2024 retained earnings only for the cumulative effect relating to periods before 2024. The cumulative prior-period adjustment is not a one-off 2025 income statement charge. The new method also affects measurement of relevant 2025 transactions.
The $7.5 million discontinued-operations loss will not recur, so analysts exclude it when projecting Harborline's future earnings. The inventory policy change restates history rather than hitting 2025 income, so any trend analysis across 2024 and 2025 must use the restated 2024 figures for a consistent comparison.
Building a Normalized-Earnings Bridge
Suppose a company reports net income of $48 million, including an $8 million pretax gain on selling an idle warehouse and a $4 million pretax restructuring expense. Assume both items are genuinely nonrecurring, both have a 25% tax effect, and neither belongs to discontinued operations.
After-tax disposal gain = $8 million(1 - 0.25) = $6 million.
After-tax restructuring expense = $4 million(1 - 0.25) = $3 million.
Normalized net income = $48 million - $6 million + $3 million = $45 million.
Removing a gain reduces normalized earnings; adding back an expense increases them. Use after-tax adjustments when starting from net income. A pretax adjustment belongs in a pretax earnings bridge.
Classification alone does not justify exclusion. Interest expense can be non-operating for a manufacturer and still recur every year. It remains relevant when forecasting earnings available to shareholders. Likewise, a charge labeled restructuring may represent an ongoing business cost if similar programs occur repeatedly. Check its history and economic purpose before adding it back.
The bridge is an analyst adjustment. It does not replace the company's reported income statement or change the required presentation of discontinued operations.
Common Exam Traps
Requiring both unusual and infrequent conditions
Candidates assume an item needs to be both unusual and infrequent to get separate treatment. Current US GAAP only requires one condition for separate disclosure within continuing operations.
Reporting discontinued operations pre-tax or within continuing operations
Discontinued operations are always shown net of tax, in a separate line below income from continuing operations, never folded into operating results.
Treating a policy change as prospective
Candidates apply a policy change like an estimate change, only going forward. Policy changes require retrospective restatement; only estimate changes are prospective.
Forgetting to reclassify prior periods for discontinued operations
Some candidates assume only the current year reflects the discontinued-operations presentation. Comparative periods shown in the same statements must also be reclassified for consistency.
Practice Question
Question: During 2025, Castlebridge Corp sold its agricultural equipment division, which met the criteria for discontinued operations. The division had a pretax operating loss of $6 million and a pretax gain on disposal of $2 million. Castlebridge's tax rate is 30%. What amount, and where, should Castlebridge report related to this divestiture on its 2025 income statement?
A $2.8 million loss, net of tax, reported as a separate line below income from continuing operations.
A $4 million loss, before tax, included within income from continuing operations.
A $2.8 million loss, net of tax, included within income from continuing operations.
Correct Answer: A
Combine the pretax operating loss and disposal gain: -6 million + 2 million = -4 million. Apply the tax rate: -4 million × (1 - 0.30) = -2.8 million. Discontinued operations are always reported net of tax, in a separate line below income from continuing operations.
Option B: Uses the correct pretax calculation but skips the tax adjustment and misplaces the item within continuing operations.
Option C: Uses the correct net-of-tax amount but misplaces the item within continuing operations instead of the required separate line.
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FAQs About Non-Recurring Items and Changes in Accounting Policies
What's the difference between non-operating items and non-recurring items?
Non-operating items relate to activities outside the core business, like interest income. Non-recurring items, such as discontinued operations or unusual or infrequent items, relate to events unlikely to repeat, regardless of whether they come from core or peripheral activities.
Are unusual or infrequent items reported net of tax?
No. Unlike discontinued operations, unusual or infrequent items are reported pre-tax as part of continuing operations, with separate disclosure on the income statement or in the notes.
How does a change in accounting policy differ from a change in accounting estimate?
A policy change, such as switching inventory costing methods, applies retrospectively and restates prior statements. An estimate change, such as revising an asset's useful life, applies prospectively and is never restated.
Do extraordinary items still exist under US GAAP?
No. US GAAP eliminated the extraordinary item classification in 2015. Material items that are unusual or infrequent are still disclosed, but not labeled extraordinary.
Why do analysts adjust net income for non-recurring items?
Because non-recurring items do not reflect sustainable earning power. Analysts often exclude them when forecasting future performance or calculating normalized profitability ratios.