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 formal use of extraordinary items has recently been eliminated under Generally Accepted Accounting Principles (GAAP), so the following discussion should be considered historical in nature.
The reporting of an extraordinary item used to be an extremely rare event. In nearly all cases, an event or transaction was considered to be part of the normal operating activities of a business, and so was reported as such. Thus, a business might never report an extraordinary item.
GAAP specifically stated that write-offs, write-downs, gains, or losses on the following items were 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 were the destruction of facilities by an earthquake, or the destruction of a vineyard by a hailstorm in a region where hailstorm damage was rare. Conversely, an example of an item that did not qualify as extraordinary was weather-related crop damage in a region where such crop damage was relatively frequent.
The intent behind reporting extraordinary items within separate line items in the income statement was to clarify for the reader which items were totally unrelated to the operational and financial results of a business.
International Financial Reporting Standards (IFRS) do not use the concept of an extraordinary item at all.
Disclosure of Extraordinary Items
An extraordinary item used to be separately stated in the income statement if it met any of the following criteria:
- It was material in relation to income before extraordinary items
- It was material to the trend of annual earnings before extraordinary items
- It was material by other criteria
Extraordinary items were 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 were reported on the income statement, then earnings per share information for the extraordinary items were to be presented either in the income statement or in the accompanying notes.