Key questions:

• What are the specific major accounting issues for the industry?
• Which accounting choices have been made by management?
• Are accounting policies and estimates the same as for other firms within the industry?
• Have accounting policies and estimates changed over time?
• What are the key limitations in the information provided in the financial statements, notes and supplementary reports?

And then the questions listed in Table 17.1

Below is a list of a number accounting items, which may be non-recurring in nature:

• Special or extraordinary items; including for instance
  • Write-down of inventories
  • Write-down of accounts receivable
  • Large provisions and reversals
  • Disposal of non-current operational assets
  • Law suits (litigations)
  • Corrections of errors related to prior years.
  • Restructuring cost
• Impairment/reversal of impairment of non-current assets
• Gains and losses that are not part of core business
• Changes in accounting estimates
• Other value adjustments then those mentioned above
• Changes in accounting policies
• Discontinued operations and assets held for sale

Research and the Carlsberg case shows that there is a tendency to classify more costs (than income) as special items/non-recurring items.

A red flag (in the context of Chapter 17) is a signal of a negative development indicating that ‘something is wrong’ related to a firm’s economic performance. A green flag is the opposite.

A red flag is identified by analysing development of different accounting numbers or ratios over a number of years and compare with peers.