Are Adjusted Accounts A Danger Sign For Investors?

Exceptional costs and non cash impairments are annual report's favourite sections when the business is in trouble but wants to report a profit.

Sometimes exceptionals are genuinely exceptional and sometimes this year's exceptionals are different from last year's exceptionals which are different from year before that's exceptionals.

Statutory Figures And Adjusted Figures

All companies are required to file accounts adhering to specific financial reporting standards but they are also free to report in addition using pretty much any accounting practices that they feel appropriate.

At first glance this seems quite sensible, a particular business may have a set of special circumstances that can be better reported using different logic.

Where I get concerned is when companies report massively different figures when using these two standards or when they focus heavily on their own internal standards and downplay the figures from the regulatory standards.

The table below comes from Non Standard Finance's accounts and it is one of the first things that you see in the 2018 Full Year's Results Statement.

Year to 31 December 2018
% change
Normalised revenue 166,502 119,756 +39%
Reported revenue 158,824 107,771 +47%
Normalised operating profit 35,876 23,684 +51%
Reported operating profit 19,517 3,802 +413%
Normalised profit before tax 14,769 13,203 +12%
Reported (loss) before tax (1,590) (13,021) +88%
Normalised profit after tax 11,572 10,890 +6%
Reported (loss) after tax (1,679) (10,335) +84%
Normalised earnings per share 3.70p 3.44p +8%
Reported (loss) per share (0.54)p (3.26)p +84%
Full year dividend per share 2.60p 2.20p +18%

In these results the Normalised figures are NSF's own, like all adjusted figures the intent is to see the true underlying performance of the business.

If you owned a business next to a river and that river flooded for the first time in recorded history it would be quite reasonable to show figures that excluded the cost of the repairs to the business as well as statutory ones that included that cost.

So when there is a variance in profit/loss, a £11.6 million profit or a £1.7 million loss you may be happy if the difference can be explained by a flood like event and deeply concerned if it can't.

Once companies get into the habit of presenting adjusted accounts I start to get worried as the need to do this often covers up the fact that the business is actually doing quite badly.


Earnings Before Interest, Tax, Depreciation and Amortisation is a good way to see how a business is trading especially when comparing it with its rivals and is a favourite of big take overs.

The objective is to remove costs that aren't directly associated with operating the business such as a loan taken out to buy it or the cost of the store refurbishment that will be needed in 5 years time.

The problem is that the items omitted still need to be paid, so reports making a big deal out of this measure can mean that the company can't afford its debts or to replace equipment necessary to operate the business.

If you look at Hays travel, they are a well established travel agents who took over a lot of Thomas Cook's shops, so it would be quite reasonable to report EBITDA for the original Hays shops and compare them with EBITDA for the ex Thomas Cook stores. How are the new stores performing in comparison with the old ones?

Reporting EBITDA for the business as a whole is much less useful.

If things are going really badly we can have Adjusted EBITDA will allow even more costs to be excluded.

Taking EBITDA to a stupid extreme, I borrow £1,000 at 5% interest at p.a. and lend the money out at 4%, EBITDA allow me to report a 4% profit.

Depreciation is much harder to evaluate, if you depreciate the value of the fixtures and fittings in a retail store down to zero value, you can keep trading but your store will look scruffy. You can't depreciate below zero in the accounts but as they get scruffier and scruffier your store will start to lose customers.

EBITDA can be useful especially if used with good intent in the same way as 0-60mph tells you something about the performance of a car.

Non Cash Impairments

Something that was previously reported as being worth x is now worth y.

Generally this means that someone overpaid for something in the past and now the accounts need to reflect this.

If these were decisions of previous management that is known to have been a bad decision then this may not be a critical concern, everyone knows that it coming and the share price reflects it.

If it is a result of an unknown bad decision or a surprise then not only is it the loss then you need to worry about but also what else might be revealed.

XL Media (LON:XLM) had a large portfolio of web sites that they used to sell advertising and in Jan 2020 Google demoted many of these sites in the search results meaning that they were less useful in generating sales. This resulted in an $81 million impairment charge for a business whose revenue for that year was $79 million.

Exceptional Costs

Something that meant real money had to be spent rather than an accounting tweak but probably wasn't expected and should not recur.

Some exceptional costs really are exceptional, in May 2019 a US fighter jet crashed into a factory, this probably incurred costs for the factory owner but they really were exceptional.

With failing companies the costs of the failed aspects of the business are often reported as exceptional costs and next year there will be a different set of exceptional costs and these are often associated with Revaluation of ......., Staff redundancy costs, Consultants cost.

Whilst they are kept as Exceptional Costs the company can carry on reporting Adjusted Profits.