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17/01/2021 10:23:16 PM

Extraordinary Items

Extraordinary items are distinguished by their unusual nature and by the infrequency of their occurrence. The vast majority of extraordinary items were gains and losses from early retirement of debt. Others included losses from natural disasters and expropriation of assets. However, the proportion of companies reporting extraordinary items has de­clined markedly. This is because under current accounting standards, gains and losses relating to the extinguishment of debt must be both unusual and infrequent to be classified as an extraordinary item, and debt refinancing does not typically meet these criteria.

Extraordinary items are classified separately in the income statement. Because of the stringent criteria for classification, extraordinary items are uncommon. Extraordinary items, when they occur, usually consti­tute less than 3% of sales. The proportion of negative and positive extraordinary items is about the same.

To qualify as extraordinary, an item must be both unusual in nature and infrequent in occurrence. These terms are defined as follows:

  • Unusual nature. An event or transaction that has a high degree of abnormality and is unrelated to, or only incidentally related to, the ordinary and typical activi­ties of the company.
  • Infrequent occurrence. An event or transaction that is not reasonably expected to recur in the foreseeable future.

Extraordinary items are reported, net of tax, as separate line items in the income statement after continuing income. When a company reports extraordinary items, continuing income is called income before extraordinary items. Any item that is either unusual or infrequent (not both) cannot be classified as an extraordinary item.

Practice also requires companies to not report certain gains and losses as extraordi­nary items because they are not unusual in nature and are expected to recur as a conse­quence of customary and continuing business activity. Examples include:

  • Write-down or write-off of receivables, inventories, equipment leased to others, deferred R&D costs, or other intangible assets.
  • Gains or losses on disposal of a business segment.
  • Gains or losses from sale or abandonment of property, plant, or equipment.
  • Effects of a strike, including those against competitors and major suppliers.
  • Adjustment of accruals on long-term contracts.