Adjustments to NI & Equity - Quick Q

JGovender

I just did a question where they give NI, Equity, and ROE and tell you that there were unusual gains and losses throughout the year that should be removed. The question asks for the new ROE after removal.
Very simple calculation. My only issue is that after adjusting the NI for the (net of tax) unusual gains and losses, the new ROE is computed using the new NI and the OLD Equity. I’m trying to understand why the Equity shouldn’t be adjusted as well for the same amount.. Wouldn’t the adjustment to NI “flow” to Retained Earnings & Equity?
Qbank Q 87553 if you’re curious for the whole question.

bigredhockey55

Sorry but I’m not sure how to adjust for NI, just take NI and add back the unusual stuff as given right? No need for adjusting tax effect on unusual gains/losses right? Thanks.

former

unusual items are pretax, so you take NI and divide by (1-t) to arrive at EBIT. Adjust EBIT, thjen take adjusted EBIT and multiply by (1-T).
or you can just take the gains and losses and multiply them by (1-T) and then adjust NI but the first way is more intuitive for me.

bigredhockey55

I thought the unusual items are reported below NI and net of tax, aren’t they? I remember there are 3 items that report below NI and all are net of tax, can’t remember any right now. Are you sure you’re talking about unusual items or non-operating items? Please help as my head is pretty messed up right now!

BC_MBA_student

Clean surplus doesn’t have to hold- all of the adjustments you make to NI will flow to equity regardless of whether they there through NI, or something else like OCI.
First and foremost, Equity= Assets - liabilities, so just because you’ve reclassified an item, equity will still reflect it.

LorrinCFA

Accounting Charges, Disc Operations, and Extraordinary Items are reported above NI and net of taxes.
Other items that are not unusual AND infrequent must be reported gross of taxes.

therecruit

sbmarti2: so if you say equity reflects changs to NI then why dont you adjust equity after reclassifying an item that affects NI, if asked to calculate the new ROE