Nonoperating Income

Nonoperating income, also called nonoperating revenue or other income, is income a company earns from activities outside its main line of business. Typical examples are interest earned on cash and deposits, dividends from investments, gains on selling property or equipment, gains on investments, rental income for a company not in the property business, and foreign exchange gains. It is reported on the income statement below operating income, usually in a section called "other income and expenses."

Whether an item is operating or nonoperating depends on the business. Interest income is nonoperating for a manufacturer but is the main operating revenue of a bank. Rent is nonoperating for a retailer that sublets spare space, but operating for a real estate company. Distinguishing the two helps readers see how much of a company's profit comes from its core business and how much from incidental sources that may not continue.

• Interest income on bank deposits, money market funds, bonds and loans to others, often reported as interest revenues.
• Dividend income from shares held as investments, and equity-method income from associates.
• Gains on investments, including increases in the fair value of equity securities and gains realized on sale.
• A gain on sale of assets, when property, plant or equipment is sold for more than its carrying amount.
• Foreign exchange gains on cash or borrowings held in other currencies.
• Insurance recoveries above the carrying amount of damaged assets, and gains on settling debts below their carrying amount.

A technology company reports operating income of $40,000,000. It holds $300,000,000 of cash and short-term investments, which earned $13,500,000 of interest during the year. It also sold an office building for $9,000,000 that had a carrying amount of $6,000,000, recording a $3,000,000 gain. Its interest expense is $2,000,000. Nonoperating income totals $16,500,000, and income before tax is:

Here $\text{Operating income}$ is profit from the core business, $\text{Nonoperating income}$ is the income from outside it, and $\text{Nonoperating expenses}$ include interest and similar costs. Pre-tax income is $40,000,000 plus $16,500,000 minus $2,000,000, or $54,500,000. Almost 30 percent of pre-tax profit comes from nonoperating sources. If interest rates fall sharply, or if the company spends its cash on an acquisition, that income may disappear, and the one-off building gain will not recur.

US GAAP does not set a strict definition, so companies have some choice in where they place certain items. SEC Regulation S-X requires public companies to report nonoperating income separately from operating revenue. Under IFRS, gains on disposal of property, plant and equipment may not be classified as revenue. IFRS 18, effective from 2027, will introduce defined investing and financing categories that will place most interest and dividend income outside operating profit for ordinary companies. Unusual or infrequent gains must be disclosed, but US GAAP has not allowed the label "extraordinary item" since 2015. In the statement of cash flows, gains on asset sales are subtracted from net income in the operating section, because the full proceeds appear under investing activities.

Nonoperating income can flatter reported earnings. Analysts focus on operating income and operating margins to judge the performance and prospects of the core business, and they usually exclude one-off gains when estimating sustainable earnings or valuing a company. A rising share of profit from nonoperating sources can be a warning sign that the main business is weakening. On the other hand, steady interest income on a large cash balance is genuine and relatively predictable, and some valuation methods treat the cash itself as a separate asset. Items such as investment revenues are reported in the same section, and their mirror images, such as interest expense, are discussed under nonoperating expenses. In each case readers should check the notes, which describe the components and explain any large or unusual items, before relying on net income alone.