Overview of Extraordinary Items
An extraordinary item in accounting is an event or transaction that is considered abnormal, not related to ordinary company activities, and unlikely to recur in the foreseeable future. The reporting of an extraordinary item should be an extremely rare event. In nearly all cases, an event or transaction is considered to be part of the normal operating activities of a business, and should be reported as such. Thus, a business may never report an extraordinary item.
GAAP specifically states that write-offs, write-downs, gains, or losses on the following items are not to be treated as extraordinary items:
- Abandonment of property
- Accruals on long-term contracts
- Disposal of a component of an entity
- Effects of a strike
- Equipment leased to others
- Foreign currency exchange
- Foreign currency translation
- Intangible assets
- Sale of property
Examples of items that could be classified as extraordinary are the destruction of facilities by an earthquake, or the destruction of a vineyard by a hailstorm in a region where hailstorm damage is rare. Conversely, an example of an item that does not qualify as extraordinary is weather-related crop damage in a region where such crop damage is relatively frequent.
The intent behind reporting extraordinary items within separate line items in the income statement is to clarify for the reader which items are totally unrelated to the operational and financial results of the business.
International Financial Reporting Standards (IFRS) do not use the concept of an extraordinary item at all.
Disclosure of Extraordinary Items
You should classify an extraordinary item separately in the income statement if it meets any of the following criteria:
- It is material in relation to income before extraordinary items
- It is material to the trend of annual earnings before extraordinary items
- It is material by other criteria
Extraordinary items should be presented separately, and after the results of ordinary operations in the income statement, along with disclosure of the nature of the items, and net of related income taxes.
If extraordinary items are reported on the income statement, then earnings per share information for the extraordinary items must be presented either in the income statement or in the accompanying notes.
To report extraordinary items properly, it is best to set up the chart of accounts with an extraordinary items account which is referenced by the accounting report writer to automatically include an extraordinary item line in the income statement.