If I'm looking at the historic set of accounts for a company, maybe last year's accounts I think to myself, if I could clean EBIT or EBITDA for last year, then that will help me predict or forecast EBIT or EBITDA for next year If I'm thinking of buying this company, that's hugely useful. I could predict the EBIT that I could earn as the owner So historic EBIT or EBITDA can help predict future EBIT or EBITDA but only if non-recurring items are removed So the next question is, what are the non-recurring items? Well firstly we could look for large gains or losses on sale of subsidiaries. Also a good example of a non-core item We might have restructuring all reorganization expenses Severance costs, such as redundancies An impairment or right down cost. An impairment is where you have an extraordinary depreciation in one year So instead of having your normal deprecation (a little bit of value is lost every year) You have a very large amount drop off in excess of normal depreciation You may have a fine or a penalty litigation costs, so defending a law suit Merger and acquitions feesvor integration costs after a merger and there are many others as well Now they're just the non-recurring items, of course we have to go looking for non-core and non-controlled items as well So how can we find these non-recurring items? Well here's our income statement and this is where we're going to start, we need a process! I don't want to go through hundreds and hundreds of pages of financial statements if I can avoid it So I start at the operating profit, in this example it's been called the operating income and I'll now look above operating profit for any obvious items Here I can see one, restructuring and asset impairment charges. That definitely feels like a non-recurring item there Next up, I'll look below operating profit Here I'm looking for any operating items that the company has left out of operating profit If I saw an item there maybe "other operating income" or "other operating expenses" I might think to myself hang on, I think that should be included in operating profit We've got a strange item here, gains or losses on equity investments net Do I think that should have been included in operating profit? Probably not Feels like a one off, a non-recurring item so that's probably okay where it is Lastly, we now want to check through the rest of the financial statements in particular check the MD&A, management discussion and analysis and the foot notes for more detail and embedded non-recurring items It says here you should use the lines above operating profit to guide your search and I definitely would do that I would look at the cost of sales footnote, the research and development footnote, marketing, general and administrative footnote All of those, anything above operating profit, I would look through carefully for any small or embedded non-recurring items e.g. impairments I'd also use the line below operating profit as those I can safely ignore The gains, losses on equity investments net line If I saw that in a footnote, I'd start rejoicing. Wow I found a non-recurring item, great! I can add that back But actually in this case, this was not above operating income It was not dirtying the operating income and I don't have to clean it out. So if I found this in the footnotes I'd go "phew, don't worry", I don't need to add that one back, I can safely ignore it