The Simulated FHR is the FHR adjusted for abnormal items, calculated by adding or subtracting the abnormal amount from your operating income. It shows what your FHR would be if the abnormal items on your financial statements did not exist. It appears on your FHR Report whenever one or more abnormal items are identified.
What counts as an abnormal item
An abnormal item is an operating gain or loss that the company or its auditors have explicitly classified as abnormal because it is either unlikely to recur or represents an unusual magnitude.
Typical examples include:
Restructuring costs. Charges incurred when furloughing or laying off employees, closing manufacturing plants, shifting production to a new location, or writing off assets.
Merger or acquisition costs. Costs incurred when the company is engaged in a merger or acquisition of another firm.
Asset impairment or write-down. Occurs when the company recognizes that an operating asset is not worth the book value at which it had been recorded. Impaired assets may be written down while still in use or classified as held-for-sale if no longer in use. Common triggers include changes in regulation, technology, or business climate, and declines in usage rate.
Goodwill impairment. Occurs when a company has paid more than book value for an acquired asset, and the value of that asset subsequently declines, requiring the book value to be adjusted down.
Litigation settlement costs. Costs tied to operating activities, commonly from contract disputes with customers, suppliers, or joint venture partners. Shareholder actions can also impact the company when the company has guaranteed its counterparties' financial obligations.
Goodwill amortization. The gradual, systematic reduction of the goodwill asset through periodic amortization charges.
How to use the Simulated FHR
Use your actual FHR as the source of truth and treat the Simulated FHR as additional insight. The gap between the two tells you how much work the abnormal items are doing on your rating:
If your Simulated FHR is close to your actual FHR, abnormal items are not meaningfully affecting the rating.
If the two differ noticeably, abnormal items are pushing your rating in one direction and it is worth understanding which items and why.
A common question is whether the actual rating can be set aside in favor of the simulated one. We advise caution: the actual rating should remain the primary read, especially since an item classified as abnormal may still prove to be symptomatic of a larger issue, which is to say, not actually abnormal at all.
Where the Simulated FHR appears in your shared report
The Simulated FHR is included in the Standard Report only. If you share a Summary Report with your client, that report does not include the Simulated FHR. The Summary Report excludes all financial data, and because the Simulated FHR is a financial-data output, it is excluded alongside the rest.
You can change your disclosure level to Standard at any time via the Manage Sharing section on your homepage.
What the Simulated FHR does not cover
The Simulated FHR only accounts for items that already appear on your financial statements. It does not simulate events, strategies, or decisions you are planning but have not yet executed.
If you want to model how planned changes would affect your rating before your next financial submission, use ActionPath to set strategies and targets and see the projected FHR that would result.