This document discusses potential adjustments that may be made to financial statements for purposes such as business valuation, litigation support, and transaction advisory. It outlines adjustments that could be made to balance sheets, such as adjusting investments, inventory, fixed assets, intangibles, and leases. It also discusses income statement adjustments for comparability between companies, removing non-operating and non-recurring items, and discretionary expenses. The purpose of such adjustments is to normalize financial statements, facilitate comparisons, and reflect economic reality.

1. A Global Reach with a Local Perspective
www.decosimo.com
Financial Statement Adjustments
BRENT MCDADE – BRENTMCDADE@DECOSIMO.COM

2. Decosimo Advisory Services
 Business Valuation
 Litigation Support
 Transaction Advisory

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

12. What is Normal?

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

15. Brent “Normalized”

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.