What Is an Extraordinary Item?
Let me explain what an extraordinary item used to be in accounting. These were gains or losses from events that were both unusual and infrequent, and companies had to classify them separately, present them clearly, and disclose them on their financial statements. You'd often find further details in the notes to those statements. The reason for separating them was that they were typically one-time occurrences, not part of regular operations, and not expected to happen again.
Back then, companies would show these items apart from their operating earnings to give you a clearer picture of ongoing performance. But things changed in January 2015 when the Financial Accounting Standards Board, or FASB—the body that sets accounting standards for U.S. companies—decided to eliminate the whole concept of extraordinary items. Even so, you still see companies reporting nonrecurring items, like income from selling land, but without that special label.
Key Takeaways
To sum it up quickly, extraordinary items covered gains or losses from those rare, unusual events, kept separate on the financial statements. FASB got rid of this treatment in January 2015, mainly to cut down on the costs and headaches involved in preparing those statements.
Understanding Extraordinary Items
The rules we're talking about come from the generally accepted accounting principles, or GAAP, which FASB establishes and updates. They discontinued the extraordinary items treatment specifically to make financial statement preparation less costly and complex.
Before 2015, companies spent a lot of time figuring out if an event qualified as extraordinary. They'd report the net-of-tax gains or losses from these items separately on the income statement, right after income from continuing operations.
The FASB update only removed the requirement to identify and label events as extraordinary starting in fiscal year 2015. You still have to disclose infrequent and unusual events, but without calling them extraordinary. Plus, companies no longer need to calculate the income tax effects or show the impact on earnings per share, which is basically the company's profit divided by its outstanding shares.
This change didn't touch the reporting and disclosure rules for unusual and infrequent events or transactions—they remain the same. Companies must disclose these on the income statement, including their pre-tax effects, and they can even name them specifically, like 'Effects From Fire at Production Facility.' Note that the International Financial Reporting Standards, or IFRS, never included extraordinary items in their standards.
Requirements for an Extraordinary Item
For something to count as an extraordinary item, it had to be both unusual and infrequent. An unusual event meant it was highly abnormal, not related to the company's normal operations, and reasonably not expected to happen again. It wasn't uncommon for businesses to go years without reporting any such items.
On top of separating these on the income statement, companies had to estimate the income taxes tied to them and disclose the earnings-per-share impact. Examples included losses from disasters like earthquakes, tsunamis, or wildfires. While some events, like fires, were straightforward to designate and measure, others with indirect effects on operations were much harder to evaluate.
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