Special Item

What Is a Special Item?

In corporate accounting, a special item is a large, one-time expense or source of income that a company does not expect to recur in future years.

Special items are reported on the income statement and are separated out from other categories of income and expenses so investors can more accurately compare the company's numbers across accounting periods. Examples of special items include extraordinary expenses, restructuring charges, gains from the elimination of debt, and earnings from discontinued operations.

Understanding Special Items

There is a bias toward assuming that special items are used to manipulate investors. However, special items are often legitimate, and it is normal for businesses to occasionally experience one-time events that are not expected to have an ongoing effect on income.

These items can include fines, gains from elimination of debt, and earnings from discontinued operations. However, if a company reports special items on its income statement year after year, this can be a red flag for investors because not only do the recurring special items make it difficult to gauge the company's performance across time, but they also indicate instability in the business.

Special items should not be confused with an exceptional item. These are a large charge incurred that must be noted on a company's balance sheet, but which are considered to be part of ordinary business charges. They must be disclosed due to their sheer size or frequency.

Special Items and Potential Fraud

Some special item charges do indeed only take place once. However, many companies incorrectly record charges that they repeatedly incur in the course of their usual business activities as one-time charges. This practice may make the company’s financial health look better than it really is, and it is a practice that investors should be aware of.

Many consider this practice to be a dangerous trend. Some companies even use restructuring charges as a device to improve future earnings and profitability. By taking large restructuring charges, firms reduce depreciation in future periods and thus increase earnings. This is accentuated when profitability is measured on a return basis since the book value of capital and equity is also reduced by large restructuring charges.

Thus, many analysts regard one-time charges with skepticism, and the adjustments should reflect what they see. If the one-time charges are really operating expenses, they should be treated as such and earnings estimated after these charges. If one-time charges are actually one-time charges, earnings should be estimated prior to these charges.

Example of a Special Item

For example, XYZ company manufactures widgets. The government of the country where XYZ company operates has decided it is going to fine widget makers who don't use a certain type of widget press that the government favors. XYZ company decides not to adopt the new widget press, and so is fined $100,000,000.

After paying the fine, XYZ company decides this fine is extremely costly and immediately decides to purchase the government-mandated widget press so as not to incur the penalty in future years. This $100,000,000 fine would be listed on the income statement as a special item.