Non-Cash Charge
What is a Non-Cash Charge?
A non-cash charge is a write-down or accounting expense that doesn't include a cash payment. They can address significant changes to a company's financial standing, weighing on earnings without influencing short-term capital in any capacity. Depreciation, amortization, depletion, stock-based compensation, and asset impairments are common non-cash charges that reduce earnings yet not cash flows.
Understanding a Non-Cash Charge
Non-cash charges can be found in a company's income statement. Charges unaccompanied by a cash outflow must be recorded and are vital for firms that utilization accrual basis accounting, a system utilized by companies to record their financial transactions, independent of whether a cash transfer has been made.
Accrual Accounting
Depreciation, amortization, and depletion are expensed over the helpful lifetime of an asset that was paid for in cash at a previous date. On the off chance that a company's benefit didn't completely mirror the cash outlay for the asset at that time, it must be reflected over a set number of subsequent periods. These charges are made against accounts on the balance sheet, reducing the value of things in that statement.
- Depreciation: When a company purchases new equipment, a percentage of the purchase price is deducted throughout the asset's useful life to factor in things like wear and tear. That expense is recorded consistently in the income statement as a non-cash charge.
- Amortization: Amortization is basically the same as depreciation, yet applies to [intangible assets](/intangibleasset, for example, patents, brand names and licenses instead of physical property and equipment. In the event that a company burns through $100,000 on a patent that goes on for a decade, it records an amortization expense of $10,000 every year.
- Depletion: Depletion is a technique used to designate the cost of separating natural resources like timber, minerals, and oil from the earth. Dissimilar to depreciation and amortization, which primarily portray the deduction of expenses due to the aging of equipment and property, depletion is the genuine physical depletion of natural resources by companies.
Non-Recurring Charges
Non-cash charges can likewise reflect one-time accounting losses that are driven by changing balance sheet things. Such charges are much of the time the consequence of changes to accounting policy, corporate restructuring, the changing market value of assets or refreshed presumptions on realizable future cash flows.
General Electric Co's. (GE) $22 billion write-down of the value of its striving power business in October 2018, referred to as a goodwill impairment charge, is a great illustration of a non-repeating non-cash charge. Goodwill is added to the balance sheet when a acquisition surpasses the fair value of the acquired entity, and it must be impaired from here on out assuming the value of the acquired assets falls below original expectations. GE's big accounting charge, primarily linked to its $10.6 billion acquisition of France-based Alstom, naturally caused a commotion.
Special Considerations
Non-cash charges, as different types of write-downs**,** reduce reported earnings and, accordingly, can burden share prices. Companies frequently look to play down the significance of non-cash charges, especially one-off ones, adjusting earnings to bar their impact from financial figures.
Investors are entrusted with determining whether non-cash charges are a reason to worry. Non-cash expenses are frequently pre-hailed and harmless. Be that as it may, some might show up out the blue and act as possible red banners of poor accounting, bungle and an extreme shift in fortunes.
Features
- A non-cash charge is a write-down or accounting expense that doesn't include a cash payment.
- Non-cash charges are important for firms that utilization accrual basis accounting.
- Depreciation, amortization, depletion, stock-based compensation, and asset impairments are common non-cash charges that reduce earnings yet not cash flows.
