Non-Recurring Items and Their Treatment in QoE Reports
How to identify, classify and adjust for non-recurring items in EBITDA. A practical guide for FDD analysts and TS interview candidates.
Non-recurring items are the most contested category of EBITDA adjustments in any Financial Due Diligence. Management always presents a long list. Buyers' advisers always push back. The ability to distinguish genuine one-offs from recurring costs dressed up as extraordinary items is a core FDD skill.
What Makes an Item "Non-Recurring"?
An item is genuinely non-recurring if it meets all three of these tests:
- It will not happen again: The event or cost is genuinely isolated and will not repeat in future periods.
- It is not part of the normal cost of running the business: Some companies habitually incur "restructuring" costs every year — this is a recurring cost of management style, not a one-off.
- It is supported by evidence: Management's assertion is backed by documentation (board minutes, legal invoices, settlement agreements).
Common Examples of Non-Recurring Items
Costs
- Legal settlements and litigation fees related to a specific historic dispute
- Redundancy and severance costs from a one-time headcount reduction
- Costs related to a failed acquisition or aborted M&A process
- Costs of closing a specific facility or product line
- COVID-19-related costs (PPE, cleaning, temporary staffing) — still relevant in some historical periods
Revenues / Income
- Government grant income (COVID support, R&D grants) received once
- Insurance proceeds for a specific insured event
- Gain on disposal of a non-core asset
- Out-of-period income from a contract dispute settlement
How to Test Non-Recurring Claims
The FDD analyst's job is to challenge management's non-recurring list with rigour:
- Check prior years: Has the same type of cost appeared before? If restructuring costs appear in every year for three years, they are arguably recurring.
- Seek documentation: Ask for the invoice, board resolution or legal settlement that supports the classification.
- Consider the business model: In a rapidly growing business, some costs that look one-off (e.g. integration costs) may be structurally recurring.
- Quantify the pattern: Build a schedule showing the category of each claimed item and the total per year. Patterns are revealing.
Presentation in the QoE Report
Non-recurring adjustments are typically presented in a bridge format:
Reported EBITDA
+ Restructuring costs (one-off, see note 1)
+ Legal settlement (one-off, see note 2)
- Government grant income (one-off, see note 3)
= Adjusted EBITDA for Non-Recurring Items
Each item carries a note explaining the nature, the evidence reviewed and the rationale for the adjustment (or the rationale for rejection).
Items Often Rejected by FDD Advisers
- Recurring "one-off" restructuring programmes
- Management consulting fees for ongoing strategic reviews
- ERP implementation costs in a business that regularly upgrades its systems
- Travel costs during COVID used as a proxy for "saving" recurring expenses
Conclusion
Non-recurring item analysis is where the quality of an FDD report is often most visible. Strong analysts are those who can say "no" to management add-backs with evidence, and "yes" to adjustments that genuinely improve the quality of EBITDA.
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