There are significant differences in the way the U.S. generally accepted accounting principles (GAAP) and the International Financial Reporting Standards (IFRS) treat income or expense items that are unusual or infrequent, also known as nonrecurring. The way these items are treated has a number of important implications related to how company performance and share valuation are analyzed for forecasting future results.
While used rarely, the reasoning behind reporting irregular items separately is to make clear which ones are totally unrelated to the operational and financial results of a business. Investors should have a good understanding of these types of unusual items and how they are reported.
Many items that are reported as irregular or unusual used to be classified as extraordinary items, however, both GAAP and IFRS no longer require the classification of extraordinary items, only as nonrecurring items.
- The purpose of identifying unusual or infrequent items on a financial statement is to separate income or expenses that are not related to the core business.
- Reporting irregular items helps investors and analysts determine the current and future performance of a business.
- Irregular items can include discontinued operations, lawsuits, damage from natural disasters, and restructuring costs.
- GAAP no longer requires the reporting of extraordinary items separately from irregular items, only as nonrecurring items.
- Under GAAP, unusual or infrequent transactions must be reported either on the income statement or disclosed in the financial statement footnotes.
- Under IFRS, there is no special distinction for extraordinary items either. All results are disclosed as revenues, finance costs, post-tax gains or losses, or results from associates and joint ventures.
How Unusual or Infrequent Items Are Treated
Some items occurring on income statements are reported separately from normal income because they are considered irregular and nonrecurring. Special considerations are given to so-called unusual or infrequent items to provide clarity about special or rare circumstances to investors or regulators about a firm's current and/or future financial performance.
It is important to report unusual or infrequent items separately to help ensure the transparency of financial reporting as they are not considered part of normal business operations.
Examples of unusual or infrequent items include gains or losses from a lawsuit; losses or slowdown of operations due to natural disasters; restructuring costs; gains or losses from the sale of assets; costs associated with acquiring another business; losses from the early retirement of debt; and plant shutdown costs. Some unusual items are also categorized as discontinued operations or an adjustment due to changing accounting methods.
Accounting Treatment Under U.S. GAAP
GAAP rules were changed in January 2015, and the concept of extraordinary items was eliminated in an effort to reduce the cost and complexity of preparing financial statements. It is still necessary for companies to disclose infrequent and unusual events (such as losses from theft or early retirement of debt), but now without designating them as extraordinary.
Under GAAP, a nonrecurring item can only be classified as unusual or infrequent, but not as both.
The Financial Accounting Standards Board (FASB) believes that eliminating the concept of extraordinary items saves time and preparation costs by simplifying how these items are reported. It also helps reduce uncertainty for auditors and regulators who previously had to determine whether a preparer treated an unusual and/or infrequent item appropriately. Businesses and other organizations are now expected to report unusual or infrequent transactions either on the income statement or disclosed in their financial statement footnotes.
Accounting Treatment Under IFRS
The IFRS does not hold special distinctions for items of operational nature that occur irregularly or infrequently; rather, all results are disclosed as revenues, finance costs, post-tax gains or losses, or results from associates and joint ventures.
The International Accounting Standards Board (IASB) ceased recognizing extraordinary items under IFRS rules in 2002. The IFRS has a separate disclosure required for income or expenses of abnormal size or nature. These disclosures can be on the face of the income statement or in the notes section of the report.
The Bottom Line
Reporting unusual or infrequent items is an important process for a business as it provides clarity to investors and analysts on what income and expenses are not part of the core operations and therefore not likely to occur again. This helps investors and analysts make better judgments on the future performance of a business.
The two main accounting standards, GAAP and IFRS, approach reporting unusual or infrequent items in slightly different fashions, however, both no longer use the classification of extraordinary items for simplicity purposes. Both standards also require the items to be included in either the income statement or the notes to the financial statements.