Extraordinary Items

Definition

The financial accounting term extraordinary items refers to gains or losses appearing on a company's income statement that are both unusual and occur infrequently.  These are items that can materially affect the company's financial statements, but are not considered part of the company's normal business operations.

Explanation

To help readers of financial statements to better understand a company's quality of earnings, accountants separate expenses or revenues into several categories of irregular items.  Extraordinary items are business events and transactions that exhibit both of the below characteristics:

  • Occurs Infrequently:  given the operating environment of the company, the transaction or event is not likely to occur in the foreseeable future.
  • Unusual:  given the operating environment of the company, the transaction or event is not encountered over the course of normal operating conditions.

These transactions are typically explained in the notes to the company's financial statements and are reported separately, so readers realize they are irregular and understand their impact on the income statement.  An often-cited example of an extraordinary item is the loss associated with natural disasters such as hail, fire, and flooding.

Items that would not be considered extraordinary include losses due to labor disputes, write-off of receivables, inventory losses, and gains or losses associated with the exchange of foreign currency.  While these transactions or events can materially affect the financial statements of a company, they would likely be considered part of the company's normal business operations and / or could reasonably be expected to occur in the future.

Related Terms

income statement, materiality, unusual gains or losses, quality of earnings, transactions and events