What Is an Extraordinary Item?
Key takeaways
– “Extraordinary items” historically were gains or losses that were both unusual in nature and infrequent in occurrence, shown separately on the income statement and explained in the notes.
– In January 2015 the Financial Accounting Standards Board (FASB) eliminated the classification “extraordinary item” from U.S. GAAP (see FASB ASU 2015‑01). Companies must still disclose unusual or infrequent items, but no longer label them “extraordinary,” nor separately present their after‑tax EPS effect.
– Practically, accountants still need to identify, measure and disclose nonrecurring or unusual events (for example, casualty losses, large disposals, major one‑time gains), but they present them differently and focus on clear, specific disclosure in the notes.
Sources: Investopedia summary and FASB guidance (ASU 2015‑01). See Investopedia: “Extraordinary Item” and FASB: “Income Statement—Extraordinary and Unusual Items (Subtopic 225‑20).”
Understanding extraordinary items (historical definition)
– Two required characteristics:
1. Unusual in nature — highly abnormal and unrelated to normal business activities.
2. Infrequent in occurrence — not reasonably expected to recur in the foreseeable future.
– Examples historically classified as extraordinary (when both criteria were met): large losses from major natural catastrophes (earthquakes, tsunamis, major fires), nationalization of assets, very rare legal judgments with no business nexus.
– Presentation under old U.S. GAAP: extraordinary gains/losses were presented net of tax, separated below income from continuing operations on the income statement, and the EPS effect was disclosed separately.
Why FASB removed the “extraordinary” classification
– FASB concluded the separate classification added little decision‑useful information, and identifying items that met the strict “extraordinary” test was often costly and subjective.
– The update removed the need to determine whether an event was so rare as to be called “extraordinary,” thereby reducing complexity and cost for preparers and auditors.
What changed after the FASB update
– The “extraordinary item” line and related requirements (e.g., separate after‑tax presentation and EPS impact) were eliminated from U.S. GAAP (ASU 2015‑01).
– Companies still must disclose material unusual or infrequent items, and should present their effect on income before income taxes.
– Firms are encouraged to use clear, specific descriptions (for example, “Impact from Fire at Manufacturing Plant”).
– IFRS did not include extraordinary items either; both frameworks now avoid that separate classification.
Current practical implications for financial statement preparers
1. Identify and classify events and transactions
– Maintain a process to flag unusual or nonrecurring items (casualty losses, asset impairments tied to a one‑time event, significant litigation settlements, gains/losses on sales of significant assets, restructuring costs that are atypical).
– Evaluate whether the item relates to continuing operations, discontinued operations, or requires special disclosure (discontinued operations have separate rules).
2. Measure and record
– Measure the amount per applicable GAAP guidance (impairment rules, disposal guidance, loss recognition, etc.).
– Record standard journal entries appropriate to the nature of the event (asset charge‑offs, loss/expense recognition, gain on sale).
3. Present and disclose
– Present the item within the normal income statement line(s) (e.g., other income/expense), not as an “extraordinary item.”
– Disclose material unusual or infrequent items in the notes with:
– A clear descriptive caption (e.g., “Loss from Fire at Plant X”).
– Amounts before tax and a narrative explanation of the event, its impact, and whether similar events are expected.
– Any measurement methods and significant assumptions used.
– If the tax effect is material, describe income tax impact even though separate after‑tax line presentation is no longer required.
4. Earnings per share (EPS) and tax considerations
– Companies no longer must present EPS effects specifically for items once deemed extraordinary, but they must follow existing EPS guidance for items that affect EPS materially.
– Ensure tax accounting (e.g., recognition of deferred tax effects) follows tax law and GAAP; provide tax note explanation if material.
5. Internal controls, documentation and audit interaction
– Document the evaluation and rationale for classification and disclosures (who evaluated, criteria, amounts).
– Communicate early with auditors about any significant nonrecurring events and the planned presentation/disclosures.
– Update accounting policies and disclosure checklists to reflect that the “extraordinary” label is no longer used.
Practical steps and checklist for management and accountants
– Step 1: Monitor operations and external events to identify potential unusual/infrequent items immediately.
– Step 2: Quantify the financial impact and determine relevant GAAP measurement and presentation guidance.
– Step 3: Prepare draft income statement presentation and detailed note disclosure, including amounts before tax and narrative context.
– Step 4: Assess whether the event instead qualifies as discontinued operations or requires other specialized disclosure (e.g., related‑party transactions).
– Step 5: Calculate tax impacts and any EPS implications under EPS guidance; include tax note if material.
– Step 6: Discuss with auditors and legal counsel as needed; document judgments and approvals.
– Step 7: Communicate transparently to investors (in MD&A, press release or investor presentation) using specific labels rather than the generic term “extraordinary.”
Practical guidance for investors and analysts
– Don’t expect an “extraordinary” line item. Look for:
– Footnotes and MD&A sections titled with specific event descriptions.
– Income statement lines like “Other expense (income)” with supporting note cross‑references.
– Normalize earnings when assessing recurring operating performance:
– Adjust for material unusual/infrequent items disclosed in the notes (use pre‑tax or after‑tax as needed).
– Check whether management’s “adjusted” or “non‑GAAP” measures align with note disclosures.
– Compare across periods and peers: consistent disclosure language and numeric detail improves comparability.
Good disclosure practices — examples of language
– “During Q2 20XX, the Company incurred a $XX million loss from the fire at the Main Street manufacturing facility, recorded in Other expense. The loss includes write‑offs of damaged inventory and fixed assets and is reported before tax. Management does not expect similar losses to recur.”
– “In connection with the sale of subsidiary Y during the period, the Company recognized a $XX million gain, recorded in Other income. Refer to Note X for further details.”
Risks and red flags
– Vague disclosures that obscure material nonrecurring impacts.
– Inconsistency between managerial (MD&A) discussion and GAAP financial statement notes.
– Frequent use of “nonrecurring” or “one‑time” adjustments to inflate adjusted operating results—investigate whether items are actually recurring.
When to consult advisors
– Complex tax implications, cross‑border events, or potential regulatory/legal ramifications merit consultation with tax counsel, external auditors, and possibly valuation specialists.
– Material judgments about classification, measurement, or disclosures should be documented and reviewed with external auditors.
Further reading and authoritative sources
– Investopedia — “Extraordinary Item” (summary and historical context): https://www.investopedia.com/terms/e/extraordinaryitem.asp
– Financial Accounting Standards Board — ASU 2015‑01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225‑20)” / related FASB materials (for official authoritative guidance).
Summary
“Extraordinary items” as a labeled line on U.S. financial statements no longer exist under GAAP. The practical obligations remain: identify and measure unusual or infrequent events, present amounts appropriately in the financial statements, and provide clear, specific note disclosures so users can assess the event’s impact on current and future performance. Follow a documented process, coordinate with auditors, and disclose transparently so investors and analysts can make informed adjustments to evaluate underlying operating results.