Key Takeaways
- Extraordinary items are rare, unusual gains or losses.
- Removed from U.S. GAAP since 2015.
- Now reported as one-time events without special prominence.
What is Extraordinary Item?
An extraordinary item refers to a gain or loss resulting from an event that is both unusual in nature and infrequent in occurrence, traditionally requiring separate disclosure on financial statements under GAAP. This classification helped distinguish these rare events from regular business activities.
Since 2015, the Financial Accounting Standards Board eliminated the separate category for extraordinary items, but companies still disclose one-time events to maintain transparency.
Key Characteristics
Extraordinary items are defined by strict criteria that set them apart from other financial events:
- Unusual Nature: The event must be highly abnormal and unrelated to typical operations.
- Infrequent Occurrence: It should be rare and not expected to recur in the foreseeable future.
- Separate Reporting: Historically reported net of tax and distinct from income from continuing operations.
- Transparency: Disclosures included the tax effect and impact on earnings per share.
How It Works
When extraordinary items were recognized under GAAP, companies separated these from their routine results to provide investors clear insight into unusual financial impacts. This involved presenting such items below income from continuing operations on the income statement, after adjusting for taxes.
After the FASB’s 2015 update, the classification was removed, but firms continue to report significant one-time events either on the income statement or in footnotes, ensuring investors understand the effect of these rare occurrences on overall performance.
Examples and Use Cases
Examples of extraordinary items traditionally included severe losses or gains that were both rare and unrelated to the core business:
- Catastrophic losses: Damage from natural disasters like earthquakes or wildfires.
- Asset sales: Gains or losses from selling land or properties outside regular operations.
- Industry impacts: Severe regulatory changes or new laws affecting business activities.
- Airlines: Companies such as Delta have faced extraordinary losses due to unexpected events impacting operations.
- Energy sector: Unusual events affecting energy stocks can sometimes result in one-time gains or losses.
Important Considerations
Understanding extraordinary items is key for accurate financial analysis, but since their formal classification was removed, you should focus on one-time, infrequent events disclosed alongside regular earnings. This ensures you assess a company’s ongoing performance without distortion from rare occurrences.
Investors should also consider how these events impact metrics like days sales inventory and overall profitability, especially when evaluating companies with volatile or cyclical operations.
Final Words
Extraordinary items once highlighted truly rare financial events, but their elimination from U.S. GAAP means you now need to scrutinize unusual gains or losses within regular disclosures. Keep an eye on footnotes and management discussions to spot impacts that were previously labeled extraordinary.
Frequently Asked Questions
An extraordinary item is a gain or loss from an event that is both unusual in nature and infrequent in occurrence, historically requiring separate disclosure on financial statements to distinguish it from normal business activities.
To be classified as extraordinary, an event must be highly abnormal and unrelated to typical company operations, and it must be unlikely to recur in the foreseeable future. Meeting only one of these criteria does not qualify the event as extraordinary.
Examples include losses from catastrophic events like earthquakes or wildfires, gains or losses from the sale of land, and losses due to major casualties or new laws restricting operations. Routine losses like inventory write-downs do not qualify.
Before 2015, companies had to separate extraordinary items from ordinary results on the income statement, showing them net of tax after income from continuing operations, along with disclosing their tax effects and impact on earnings per share.
The classification was eliminated because it caused confusion about qualifying events, was applied too narrowly making such designations rare, and varied significantly across industries, leading to inconsistent reporting.
Since 2015, these events are reported as one-time events either on the income statement or in the footnotes of financial statements without special prominence, ensuring transparency without the extraordinary item label.
No, a labor strike loss is generally not considered extraordinary because strikes are neither unusual nor infrequent in many industries and are viewed as part of normal business risks.
