What is a one-time charge?

Want to learn how to interpret companies’ financial results and identify poor accounting practice and real earning potential? Companies could misuse one-time charges, which may make their financial health appear better than the reality and mislead investors. 

In corporate accounting, a one-time charge is a non-recurring item that occurs on an irregular basis during the company’s financial year.

Under the one-time charge definition, the charge must not be related to the company’s normal business operations and should be an isolated event arising from unexpected circumstances such as lawsuits, layoffs and asset sales. 

One-time charge example 

A one-time charge can be a cash charge against earnings. It can also be a non-cash charge, for example, the falling market value of a real estate property because of changes in consumer habits and business fundamentals related to economic downturn. 

Companies often write off any cost related to restructuring, which would be categorised as a one-time charge. 

Having a one-time charge means that the event should not recur, and would be unlikely to affect a company’s long-term performance and growth. As a result, financial analysts routinely exclude the effect of one-time charges in their evaluation of a company’s ongoing earnings potential. 

According to finance training and certification provider the Corporate Financial Institute, it is important to identify and highlight a one-time charge in accounting, “because it can distort the financial picture and significantly change the results of important analyses like financial statement forecasting and valuation.”

When a company uses one-time charges repeatedly, it’s more likely that those items are regular costs of doing business. Such practice is a misuse of one-time charges and indicates poor management. 

Companies could misuse one-time charges by including an unusual gain as a regular item on the income statement, which boosts its earnings. For example, if an airline company earns large profits from its fuel hedging activity, it may decide to include such profits as part of their revenue, despite fuel hedging not being its core business.

Another way to misuse a one-time charge is by writing down assets or expenses for a set financial period to reduce a company’s earnings per share (EPS). This can inflate the price earnings ratio (P/E), a performance metric that gauges a company’s value.

Companies can also create a false one-time charge by aggregating most of their expenses in a set period, for example over a quarter. This could create a false impression that the company performance has improved from the previous quarter.