434 NoNoperatiNg items, provisioNs, aNd reserves
$70 million per year, or 0.9 percent of revenues. These expenses are reported 
separately from cost of sales and SG&A. 
 Given their persistence, Boston Scientifi c’s restructuring charges should be 
analyzed to determine what portion of them represents cash (such as sever-
ance payments), whether any cash restructuring charges are likely to continue, 
and for how long. To this end, a careful reading of the company’s notes reveals 
the following: 
 In November 2018, the Board of Directors approved, and we committed to, 
a new global restructuring program (the 2019 Restructuring Plan). The 2019 
Restructuring Plan is expected to result in total pre-tax charges of approxi-
mately $200 million to $300 million and reduce gross annual pre-tax operat-
ing expenses by approximately $100 million to $150 million by the end of 
2022 as program benefi ts are realized. 
 Many restructuring charges are recorded before any cash is spent. If this is 
the case, a corresponding reserve will be recorded in the liabilities section of 
the balance sheet. In the next main section, we consider treatment of various 
reserves, including those related to restructuring charges. 
 Litigation Charges When there is likely to be a legal judgment against a 
company, the company will recognize a litigation charge. If the litigation 
charge recurs frequently and grows with revenue, treat the charge as oper-
ating. For instance, hospital systems frequently defend themselves against 
malpractice lawsuits. Since these lawsuits are a cost of doing business, the liti-
gation costs should be treated as operating costs for valuation and projected 
EXHIBIT 21.4 Boston Scientific: EBITA and Restructuring Charges
$ million
2009
63
2010
116
2011
89
2012
136
2013
101
2014
69
2015
26
2016
28
2017
37
EBITA
2,500
2,000
1,500
1,000
0
2018
36
Average restructuring
charge: $70 million
Source: Boston Scientific annual reports.

Provisions and Their Corresponding Reserves  435
forward. However, if a litigation cost is truly a one-time expense, treat it as 
nonoperating, and value any claims against the company separately from core 
operations.
Gains and Losses on Asset Sales  When an asset’s sale price differs from its 
book value, the company will recognize a gain or loss. Since current gains 
and losses are backward-looking (value has been created or destroyed in the 
past), treat them as nonoperating. Additionally, double-check to make sure 
projected free cash flow does not incorporate the asset recently sold. For in-
stance, make sure future depreciation reflects only the remaining assets.
Although gains and losses should not be included in operating profit, past 
asset sales may provide insight about the level of cash to be generated by 
future asset sales. Again, be careful to value future asset sales (and their cor-
responding gains and losses) only when the assets are not incorporated in free 
cash flow. Otherwise, the resulting double-counting will overstate the com-
pany’s value.
Provisions and Their Corresponding Reserves
Provisions are noncash expenses that reflect future costs or expected losses. 
Companies take provisions by reducing current income and setting up a cor-
responding reserve as a liability (or deducting the amount from the relevant 
asset).
For the purpose of analyzing and valuing a company, we categorize pro-
visions into one of four types: ongoing operating provisions, long-term op-
erating provisions, nonoperating provisions like restructuring provisions, 
or provisions created for the purpose of smoothing income (transferring in-
come from one period to another). Based on the characteristics of each provi-
sion, adjust the financial statements to reflect the company’s true operating 
performance. For example, ongoing operating provisions are treated the 
same way as any other operating expense, whereas restructuring provisions 
are converted from an accrual to a cash basis and treated as nonoperating. 
Exhibit 21.5 summarizes the four types of provisions and how to treat them in 
NOPAT, invested capital, and valuation.
We believe our classification system of reserves leads to better analysis, but 
the way you adjust the financial statements should not affect the company’s 
valuation. The valuation depends solely on how and when cash flows through 
the business, not on accrual-based accounting.
Adjustments for the Provisions
In Exhibit 21.6, we present the abbreviated financial statements for a hypo-
thetical company that recognizes four provisions: an environmental provision