Accounting for Extraordinary Items

Definition and Meaning of Extraordinary Items 

An extraordinary item is an event or transaction that meets two criteria: It must be both unusual in nature and infrequent in occurrence. Otherwise, an event or transaction is generally presumed to be either an ordinary or a usual activity of the entity. Being either unusual in nature or infrequent in occurrence does not qualify it as an extraordinary item [see Subsection 11.3(e)].

(a) UNUSUAL NATURE.

As mentioned above, the first criteria an item must meet to be considered extraordinary is to be unusual. The underlying event or transaction should be clearly unrelated to the ordinary and typical activities of the entity. This definition encompasses the specific characteristics of the entity, including, for example, the industry in which it operates, the geographical location of its operations, and the extent of government regulation. Thus an event or transaction may be unusual for one industry but normal for another.

(b) INFREQUENTLY OCCURRING.

The second criterion for an extraordinary item to meet is that the event or transaction is not reasonably expected to recur in the foreseeable future and is not considered to be frequently occurring. This definition considers the same features as items of unusual nature, such as industry, geographical location, and government regulation. Thus this criterion may be met by one company whereas the same underlying event would not be infrequent to another company. Past history of the company provides evidence to assess the probability of recurrence of an event.

(c) APPLICATION OF CRITERIA.

Certain gains and losses are, by definition (APB Opinion

No. 30, par. 23), considered not extraordinary items, such as:

• Write-down of receivables, inventories, equipment leased to others, or intangible assets

• Gains or losses from foreign exchange transactions or translations (including major devaluations and revaluations)

• Gains or losses on the disposal of a segment of a business (discontinued operations)

• Gains or losses from the sale or abandonment of property, plant, or equipment used in a business

• Effects of a strike (including an indirect effect such as a strike against a major supplier)

• Adjustment of accruals on long-term contracts

Only in rare instances may an event or transaction included in first and fourth bullets above clearly meet the criteria and be included in extraordinary items. Such instances would occur if the gain or loss on such an event or transaction is the direct result of a major casualty, an expropriation, or a prohibition under a newly enacted law.

 (d) EXCEPTIONS TO CRITERIA.

Some items that apparently would not meet the criteria of an extraordinary item must be classified as such under existing authoritative literature. Two such items that fit this description are gains and losses on extinguishment of debt as cited in SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and gain on the restructuring of debt in a troubled situation as discussed in SFAS No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings.”

(e) REPORTING AN EXTRAORDINARY ITEM.

The effect of an extraordinary item should be segregated if its effect is material to income before extraordinary items, to the trend in earnings before extraordinary items, or to other appropriate criteria. The materiality of individual events or transactions is considered separately and not aggregated unless the effects result from a single identifiable transaction or event that meets the criteria of an extraordinary item. The preference expressed in APB Opinion No. 30 is for individual descriptive captions and amounts for each extraordinary event or transaction on the face of the income statement. However, disclosure in the notes to financial statements describing the nature of the event or transaction comprising the extraordinary item and the principal items entering the calculation of the gain or loss is acceptable.

The extraordinary item should be shown net of applicable income taxes. Per share amounts for income before extraordinary items and net income should be given on the face of the income statement. There is no requirement to give the per share amount of the extraordinary items, but such disclosure is common.