What is an 'Extraordinary Item'
An extraordinary item consists of gains or losses included on a company's income statement from events, which are unusual and infrequent in nature. Extraordinary items are usually explained further in the notes to the financial statements, and they are the result of unforeseen and atypical events. Companies show an extraordinary item separately from their operating earnings, because it is typically recorded as a one-time charge or income, and it is not expected to recur in the future.
BREAKING DOWN 'Extraordinary Item'Extraordinary items represent income or loss from extraordinary events and transactions that must be separately classified, presented and disclosed on companies' financial statements. Before 2015, companies put a lot of effort into determining if a particular event should be deemed extraordinary. Gains and losses, net of taxes, from extraordinary items had to be shown separately on the income statement after income from continuing operations. However, in January 2015, U.S. generally accepted accounting principles (GAAP) were changed, and the concept of extraordinary items was eliminated to reduce the cost and complexity of preparing financial statements. Companies still have to disclose infrequent and unusual events without designating them as extraordinary.
Definition of an Extraordinary Item
An event or transaction is deemed extraordinary if it is both unusual and infrequent. An unusual event must be highly abnormal and unrelated to the ordinary and typical operating activities of a company. Also, an event must be of an infrequent nature, and it is reasonably expected not to recur going forward. Besides segregating the effect of extraordinary items on the income statement, companies were required to estimate income taxes from these items and disclose their earnings-per-share (EPS) impact. Examples of extraordinary items are losses from various catastrophic events, such as earthquakes, tsunamis and fire. While designating and estimating the effect from certain extraordinary events, such as fires, was easy, other events with indirect effect on companies' operations were much more difficult for chief financial officers to assess.
Elimination of Extraordinary Item Concept
In January 2015, a new accounting standards update eliminated the idea of extraordinary items. This alleviated the need for companies, their auditors and regulators to assess if an extraordinary item had been classified and disclosed appropriately starting in the fiscal year of 2015. Also, companies are no longer required to evaluate the income tax effect of extraordinary items and present an EPS effect. This accounting update left reporting and disclosure requirements for unusual and infrequent events or transactions intact. While companies must no longer entitle events and their effects as extraordinary, they still have to disclose infrequent and unusual events on the income statement and their effect before income taxes. Also, GAAP allows companies to give these events more specific names, such as "Effects From Fire at Production Facility."