Extraordinary items definition
/What are 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 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. The concept is no longer used in any of the major accounting frameworks, so the following discussion should be considered historical in nature.
Are Extraordinary Items Still Reported?
The formal use of extraordinary items has been eliminated under Generally Accepted Accounting Principles (GAAP). International Financial Reporting Standards (IFRS) has never used the concept of an extraordinary item at all, mandating instead that all transactions are to be reported as a normal consequence of an organization’s operations.
What is Classified as an Extraordinary Item?
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
Sale of property
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Examples of Extraordinary Items
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. This level of specificity was needed, because companies tried to classify as many losses as possible as extraordinary items, so that they could be pushed down to the bottom of the income statement for reporting purposes.
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.