An unusual item is a nonrecurring or one-time gain or loss that isn’t considered part of normal business operations. Unusual gains or losses can be recorded on the income statement as a separate component of income from continuing operations, or they may be identified in the footnotes to the financial statements or the management discussion and analysis (MD&A) section of the annual report.
Why Are Unusual Items Important?
Reporting unusual items separately is crucial for transparent financial reporting. Since these items are unlikely to recur, isolating them—explicitly on an income statement or in the MD&A or footnotes—allows investors to better assess the core income-generating capacity of the business.
Common Examples of Unusual Items
- Restructuring Charges: Inclusive of severance pay and factory closings.
- Asset Impairment Charges: Write-offs due to decreased values.
- Losses from Discontinued Operations: Ending a part of the business permanently.
- Losses from Early Debt Retirement: Penalties for settling debts early.
- M&A or Divestiture-Related Expenses: Costs associated with mergers, acquisitions, or selling off parts of the business.
- Gains or Losses from Sale of Assets: Profits or losses when selling substantial resources.
- Gains or Losses from Lawsuits: Legal wins or penalties.
- Natural Disasters: Damage costs and operational slowdowns due to natural calamities.
- Accounting Policy Changes: Charges resulting from changes in accounting methodologies.
The Financial Accounting Standards Board (FASB), which issues generally accepted accounting principles (GAAP), allows management to provide descriptive line items on the income statement when necessary, such as “Loss from Hurricane Damages to Office Building.”
Special Considerations
The treatment of unusual items affects how company performance is analyzed, how shares are valued, credit agreements, and executive compensation schemes. Analysts must adjust the income statement to produce “clean” EBIT, EBITDA, and net income figures for calculating price multiples. Debt agreements need to specify exclusions for certain covenant calculations. Executive pay plans must also clarify how unusual items impact compensation formulas.
Related Terms: EBIT, EBITDA, price multiples, restructuring charges, asset impairment, discontinued operations
