How do we calculate recurring or cleaned or adjusted net income? Well, we're simply going to need to add back any non-recurring expenses or deduct any non-recurring income.

Now, this is similar to the calculation of adjusted EBIT or EBITDA for non-financial companies.

But with adjusted EBIT or EBITDA, we also add back any non-core items and non-controlled items. Why is this the case? When we're calculating adjusted EBIT, we really want to find the company's core operating profit generated from its core products.

We don't want any non-core items or any non-controlled items included, say, a 25% shareholding in another company.

However, with net income, it's slightly different, since we want to find the company's continuing net income that has been generated for its shareholders.

The net income that goes to the shareholders will also include the profits or losses from non-core items and non-controlled items. So we do want to keep these in here.

Non-controlled and non-core items are kept within the cleaned net income.

Only non-recurring items are cleaned.

It's worth noting that there are some non-recurring items that are relevant only to banks that you're unlikely to see in non-financial company reports. These bank-specific non-recurring items include loan losses beyond the normal expected losses, regulatory fines, and within US GAAP only, gains or losses from changes to the accounting treatment of financial assets or liabilities.

This is not applicable to IFRS, since the ability to change the accounting treatment of financial assets and liabilities is significantly restricted.

Don't forget that a bank might also have the types of non-recurring items that non-financial companies might have, such as reorganization or restructuring costs, IT or infrastructure improvement costs, M&A-related costs, litigation or legal costs, and goodwill impairments.

So how do we actually clean net income? We start by cleaning profit before tax.

We can see here that there's a regulatory fine expense of 20.

So if we hadn't had to pay that fine, our profit before tax of 30 would have been higher by 20. It would have been 50.

And if our profit before tax would have been higher without the fine, that means we would have had to pay more tax.

But how much extra tax would we need to pay? Well, we take that extra 20 of profit before tax and apply the tax rate, in this case, 20%.

For this adjustment, it would be correct to use the marginal tax rate.

So there would have been an extra tax expense of four.

We can now calculate the cleaned net income.

We take the adjusted profit before tax, the 50, minus the adjusted tax, 11, to get to the adjusted or cleaned net income of 39.

It's also helpful to work out the post-tax non-recurring item.

The pre-tax non-recurring item was 20.

We then multiply this by one minus 20%, so this takes off the tax, and we get 20 minus four, which equals 16.

This explains the difference of 16 between the reported net income of 23 and the cleaned figure of 39.