Extraordinary items consisted of gains or losses from events that were both unusual and infrequent in nature, separately classified, presented, and disclosed on companies’ financial statements. These items were usually clarified in the accompanying notes to the financial statements. Companies reported extraordinary items separately from their operating earnings, typically as one-time, non-recurring gains or losses.
In January 2015, the Financial Accounting Standards Board (FASB)—which issues accounting standards for U.S. companies—abolished the concept of extraordinary items. However, companies are still required to report nonrecurring items such as income received from the sale of land.
Key Takeaways
- Extraordinary items were gains or losses from uncommon and infrequent events, separately classified on companies’ financial statements.
- In January 2015, FASB discontinued the accounting treatment of extraordinary items.
- The change aimed to reduce the cost and complexity associated with preparing financial statements.
The Evolution of Extraordinary Items
The accounting standards established and updated by FASB are known as generally accepted accounting principles (GAAP). FASB’s move to remove the concept of extraordinary items was intended to lessen the financial reporting burden and complexity for companies.
Prior to 2015, quite a bit of effort was required from companies to identify an event as extraordinary. Gains and losses net of taxes from extraordinary items had to be shown separately on the income statement after income from continuing operations.
The update only removed the need for identifying and reporting certain rare events as extraordinary. Companies must still disclose unusual and infrequent events but no longer need to categorize them as extraordinary. Additionally, companies do not need to consider the tax impact of these events or present their effect on earnings per share (EPS).
Although the term “extraordinary item” is no longer used, companies must still communicate noteworthy events clearly. For example, “Effects from Fire at Production Facility” might be used to describe such incidents under the new guidelines. International Financial Reporting Standards (IFRS) do not include the concept of extraordinary items in their accounting framework.
Defining Extraordinary Events
An event or transaction was considered extraordinary if it was both unusual and infrequent. An unusual event is one that is highly abnormal and not linked to the normal operating activities of a company, and it should reasonably be expected not to recur. Therefore, it wasn’t uncommon for companies to not present this line item for extended periods.
Beyond segregating these items on the income statement, companies had to estimate the income taxes from such events and disclose their earnings-per-share (EPS) impact. Examples of extraordinary items might include losses from catastrophic natural events like earthquakes, tsunamis, and wildfires. However, accurately designating and assessing the impact of these events was often challenging, especially for those with indirect effects on operations.
Related Terms: nonrecurring items, earnings per share, income statement, equity, international financial reporting standards.
References
- Financial Accounting Standards Board. “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20)”, pages 1-2.
