Unusual or Extraordinary Items
Occasionally, a company will encounter an item that is so extraordinary that it merits special display on the income statement. Under IAS 8, extraordinary items are:
Income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and therefore are not expected to recur frequently or regularly.
Companies must consider their particular facts and circumstances to determine whether an item is extraordinary, as an item could be extraordinary for some companies but not others. IAS 8 notes that events such as the expropriation of assets or natural disasters such as earthquakes would normally qualify as extraordinary items for most companies. However, an earthquake might be extraordinary for a company whose factory is destroyed but not for the property and casualty insurance company that insured the loss.
Under U.S. GAAP, Accounting Principles Board (APB) 30 provides that:
Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Thus, both of the following criteria should be met to classify an event or transaction as an extraordinary item:
a. Unusual nature—the underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates.
b. Infrequency of occurrence—the underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates.
AT&T’s footnote disclosure states that (amounts in millions):
2003 includes an extraordinary loss on our real estate leases related to the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 46 “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (FIN 46).
Certain items are excluded from the definition of an extraordinary item, such as strikes, write-downs of assets including inventory, sales or other dispositions of assets, and litigation settlements. If companies were given too much latitude in classifying items as extraordinary, they might be tempted to report all losses as extraordinary items and all gains as continuing operations. Similar to the impact of discontinued operations, the separate disclosure of extraordinary items enables investors to evaluate continuing operations and the extraordinary item individually.
Both U.S. and international standards provide that if an item does not meet the definition of extraordinary but is of sufficient magnitude or nature that its disclosure would be relevant to financial statement users, such items should be disclosed separately on the face of the financial statements or footnotes. Such items are commonly referred to as unusual items.
For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
