3. What We Will Cover Today
Potential Balance Sheet Adjustments
Potential Income Statement Adjustments
Adjustments You’ve Made
4. Why do we make adjustments?
Normalize
Facilitate comparisons
Reflect economic reality
5. A Global Reach with a Local Perspective
www.decosimo.com
Potential Balance Sheet Adjustments
6. Potential Balance Sheet Adjustments
Investments:
Be careful with actively-traded, available-for-sale, and
held-to-maturity distinction
BIG?
Pass through?
Inventory:
Consider using LIFO for inventory, as the inventory
balance will more accurately reflect the current cost
(and potential value) of inventories
7. Potential Balance Sheet Adjustments
Fixed Assets:
Typically, accumulated depreciation ≠ decrease in
asset’s market value from cost, so appraiser should
consider the market value of the asset
Consider the tax treatment of a sale at that market
value and whether the entity is pass-thru
Intangibles:
Remove those that represent no value to the
hypothetical buyer (sunk costs)
Be careful with intangibles that are tested for
impairment on a regular basis
8. Potential Balance Sheet Adjustments
Other Assets:
Any off-balance sheet assets
Operating Leases:
Consider converting operating leases to capital
leases (is this actually an asset and liability that
should be reflected on the balance sheet?)
Related Party Investments:
Does the treatment reflect the market value? Beware
the equity method
9. Potential Balance Sheet Adjustments
Receivables:
Appropriate allowance
Standard / premise differences
Other Potential Issues:
Working Capital Excess / Deficiency
Defined Benefit Pension Plans
Stock-Based Compensation
Companies with Multinational Operations (Foreign
Currency Translation)
10. Balance Sheet Adjustment Discussion
Control vs minority
Built-in-gains
Nonoperating assets / liabilities
11. A Global Reach with a Local Perspective
www.decosimo.com
Income Statement Adjustments
13. Normalization
Broadly, normalization (also spelled normalisation)
is any process that makes something more normal,
which typically means conforming to some regularity
or rule, or returning from some state of
abnormality…
Wikipedia
(http://en.wikipedia.org/wiki/Normalizat
ion, accessed April 20, 2010)
14. Michael Scott on Wikipedia
“Wikipedia is the best
thing ever. Anyone in the
world can write anything
they want about any
subject. So you know you
are getting the best
possible information.”
Michael Scott
The Office
16. Goals of Adjustments
Present information on a basis comparable to that of
other companies
Present financial data on a consistent basis over
time
Remove distortions
Ensure that historical financials reflect the true
operating performance
Put historical financials into a form that provides a
basis for forward-looking estimates
17. Income Statement Adjustments
Comparability:
FIFO vs. LIFO
Depreciation methods
Operating vs. capital leases
Related party items
18. Income Statement Adjustments
Non-Operating Items:
Boats, airplanes, etc.
Compensation of non-working family members
19. Income Statement Adjustments
Non-Recurring Items:
Loss of sales/direct expenses from a major customer
Changes in interest rates
20. Income Statement Adjustments
Discretionary Items:
Owner compensation and perks
Family member compensation
Rent
Interest
Depreciation
21. Income Statement Adjustments
Consider using LIFO on the income statement, as
COGS will reflect most recent costs
Is this a good time to talk about taxes?
22. Control vs. Minority
Can discretionary expenses be adjusted for minority
interests?
What exactly do you mean by discretionary?
23. CONNECT WITH ME
Brent McDade, ASA, CBA
423.266.5212
brentmcdade@decosimo.com
On LinkedIn:
www.linkedin.com/in/brentmcdade
The contents and opinions contained in this article are for informational purposes only. The information is
not intended to be a substitute for professional accounting counsel. Always seek the advice of your
accountant or other financial planner with any questions you may have regarding your financial goals or
specific situations.