Extraordinary loss definition
/What is an Extraordinary Loss?
An extraordinary loss is a loss resulting from a business transaction that is highly unusual, should occur only rarely, and which does not result from operating activities. These losses are reported separately on the income statement from operating earnings, in order to keep from confusing readers about the state of a firm’s earnings. The intent behind this classification system was to ensure that the results of an organization’s core operations were not sullied by highly unusual events that might mislead financial statement readers into believing that a business was performing more poorly than was really the case.
Note: The classification of a transaction as an extraordinary loss is no longer allowed under GAAP and has never been allowed under IFRS (where it is instead presumed to be included in operating results).
Examples of Extraordinary Losses
An example of an extraordinary loss is the damage caused by an earthquake in an area where earthquakes are uncommon, or tornado damage in an area where the incidence of tornadoes is low. Another example of an extraordinary loss would be the loss of company assets due to expropriation by a foreign government. Conversely, frost damage to crops in an area where frost damage is relatively common would not qualify for classification as an extraordinary loss.
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Presentation of Extraordinary Losses
An extraordinary loss is reported as a separate line item in the income statement, net of taxes, and after the results of operations. By doing so, the effects of the loss on the reported financial results and financial position of a business can be more clearly understood.
Extraordinary losses are much more frequently reported than extraordinary gains, since businesses have an incentive to report these losses outside of their operating results to make their operating performance look better. Conversely, there is an incentive to include extraordinary gains in operating results, also in order to make company performance look better.
If an extraordinary loss is immaterial to the financial results of a business, it is usually acceptable to aggregate the loss into other line items in the income statement.