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What is an Earnings Recast?

An earnings recast is a revision of previous earnings reports, in which a company has made different choices with their accounting methodology that they feel are a better representation of their accounts.

A common time to do this is after a company has divested itself of a subsidiary, when it will publish recast financial statements from the preceding years that show the company’s performance without the subsidiary being included.

Earnings recasts can be the result of a variety of circumstances, among which are the adoption of a new accounting method, the divestiture of a division or subsidiary of the company, if an international company will begin using a different currency for their accounting, or in preparation to sell a privately-held corporation to ensure that earnings are viewed without the current expenses such as salaries, interest payments, and depreciation that primarily apply to the current ownership.

In the case of privately-held companies, business brokers and valuation experts will typically do a recast of financial information when a business owner is attempting to sell out. These tweaks to accounting are called recast adjustments. Private companies may also recast their financial statements due to auditing required prior to being publicly traded.

For publicly traded companies, earnings are usually only recast to give investors a clear picture of how the company was doing without a division or subsidiary which has since been sold or is possibly about to be sold.

Because all subsidiaries and affiliated companies in which a corporation owns majority interest must be included in consolidated financial statements and treated as one entity for tax purposes, investors would not have had much of that information available to them theretofore.

Companies rely on their shareholders in many ways, and it is important to maintain good relations by remaining transparent, honest, and forthright with them at every opportunity.

Keywords: privately-held companies, adjusted earnings, Cash Flow Statement, going public, business brokers,