Unrecognised EBIT

Now why would accountants calculate net profit, reverse part of the calculation, give it a name: EBIT, and not include it in the financial statements?  

Companies do not include EBIT in their financial statements because they don’t use it as an internal measure of profitability. Accountants outside the company use it to compare the profitability of different companies.  So only some accountants use EBIT, and only some of the time.

In addition EBIT is not recognised by accounting standards, so in theory EBIT does not exist officially. And because it doesn’t exist in theory, accountants do not have a standard way of calculating it.  

EBIT =net profit + interest + taxation, but for instance accountants cannot agree on whether the interest expense is just that, or whether it should also include other related expenses for instance currency gains or losses on the interest bearing loan.

In March 2017, the IFRS did start a discussion at one of their public meetings by presenting a ‘Staff Paper’ on EBIT and whether it should be included in financial statements. [1] I don’t know if it was ever discussed, but I do know that EBIT is still not part of international standards.

In the earnings statement accountants could highlight EBIT on the way to get to their net earnings, but no, that would be too logical and too easy. Let’s make it more complicated and calculate it separately or not at all. And let’s not agree on how to calculate it.

So we still have an accounting term: EBIT widely used by accountants, not part of the official financial statements, vital, apparently, for understanding the profitability between companies, with no recognised definition, where readers of the said financial statements are required to calculate it on their own.

And you thought accountants were logical, methodical and clear with numbers. Not with EBIT!

[1] IFRS, AP21A, Staff Paper, Paper Topic Earnings before interest and tax (EBIT), March 2017 https://www.ifrs.org/content/dam/ifrs/meetings/2017/march/iasb/primary-financial-statements/ap21a-pfs.pdf