Nonoperating Expense

A nonoperating expense is a cost or loss that does not come from a company's core, day-to-day business activities. For most companies, the largest nonoperating expense is interest expense on borrowings. Others include losses on the sale of property or equipment, losses on investments, foreign currency losses on financing balances, and costs of litigation or restructuring that are unrelated to normal operations, depending on how the company presents them.

On a multiple-step income statement, nonoperating expenses appear below operating income, in a section often headed "other income and expenses" or "nonoperating items." Separating them lets readers see how much profit the business generates from its main activities before the effects of financing decisions and incidental events.

• Interest on loans, bonds and lease liabilities, which reflects how the company is financed rather than how well it operates. Banks and other lenders are an exception, because interest is their core cost.
• Losses on disposal of long-term assets, such as selling a building or equipment for less than its carrying amount.
• Losses on investments in securities, including fair value declines on equity holdings and losses on equity-method investees.
• Foreign exchange losses on borrowings or cash held in other currencies.
• Losses from debt extinguishment, when debt is repaid early at a premium.
• Certain one-off items, such as settlements of lawsuits unrelated to the main business, which some companies show outside operating income.

A regional retailer reports operating income of $6,500,000. Below that line it shows interest expense of $1,100,000, a loss of $250,000 on selling an old distribution center, and a foreign exchange loss of $50,000 on a euro-denominated loan. It also has $150,000 of interest income. Total nonoperating expenses are $1,400,000, and net nonoperating items are a charge of $1,250,000. Income before income taxes is:

Here $\text{Operating income}$ is profit from the core business, and the other two terms capture financing costs, investment results and incidental gains and losses. The result is $6,500,000 minus $1,400,000 plus $150,000, or $5,250,000. An analyst comparing this retailer with a debt-free rival would focus on the $6,500,000 operating figure, because the interest burden reflects capital structure rather than the stores' performance.

US GAAP does not define operating and nonoperating items precisely, so companies have some discretion. SEC Regulation S-X specifies certain captions for public companies, including interest expense and nonoperating income, but the boundary still varies. For example, some companies include losses on routine equipment disposals in operating expenses, while others show them below operating income. Under IFRS, IFRS 18, issued in 2024 and effective from 2027, will require income and expenses to be classified into operating, investing and financing categories, with interest on borrowings in the financing category, which will make the line between operating and nonoperating items more consistent.

Items that are unusual or infrequent must be disclosed separately, either on the face of the income statement or in the notes, but since 2015 US GAAP no longer allows them to be labeled "extraordinary." Results of discontinued operations are shown separately again, net of tax, below income from continuing operations.

Separating nonoperating expenses helps analysts assess the sustainability of earnings. Operating margin and operating income are used to compare companies with different financing, while ratios such as the interest coverage ratio compare operating profit with interest expense to judge the safety of debt. Measures such as EBIT strip out interest and taxes for the same reason. Readers should be cautious, however: companies sometimes classify recurring costs as nonoperating to make operating results look stronger, so the notes and a comparison with prior years are important. Gains on similar items are reported in the same section as nonoperating income, and items such as a gain on sale of assets often offset nonoperating losses in a given year.