Below the line definition
/What is Below the Line?
Below the line refers to a method for differentiating between different classifications of income statement line items. Expenses considered to be unrelated to the ongoing operations of a business are considered to be below the line, as are non-recurring items. For example, interest income and interest expense are unrelated to operating activities, and so would be classified as below the line. Or, a one-time expense related to tornado damage to company facilities would be classified as below the line. In addition, an impairment charge for a fixed asset might be classified as below the line.
Conversely, operating expenses are considered to be above the line. These expenses include the cost of goods sold, selling expenses, and administrative expenses, and comprise the bulk of all business expenses.
A different interpretation of the concept is that "above the line" refers to the gross margin earned by a business. Under this interpretation, revenues and the cost of goods sold are considered to be above the line, while all other expenses (including operating expenses, interest and taxes) are considered to be below the line.
Understanding Below the Line
The below the line concept is useful for the readers of an organization’s financial statements, because it concentrates the reporting on the operational aspects of the business. Readers want to know if the core operations are capable of generating a profit; if not, then the business is in serious trouble.
Fraudulent Use of Below the Line
A business could take the below the line concept to an extreme, and move some expenses completely off the income statement. A firm may classify certain expenditures as being capital expenditures, thereby pushing them to the balance sheet. Or, an expense is charged against a reserve account rather than being charged directly to expense. For example, a bad debt may be charged against the allowance for doubtful accounts, so that a specific bad debt does not appear on the income statement.
Publicly held firms may attempt to recharacterize some of the expenses in their income statements as being below the line, attempting to convince investors that the underlying operations of the firm are performing better than the total reported profits (or loss) of the organization. Doing so results in non-GAAP earnings, for which the SEC has specific reporting requirements.