Extraordinary Items

Definition

Extraordinary items are significant events or transactions that are both unusual in nature and infrequent in occurrence. They are reported separately on the income statement as they are distinctly different from the normal, recurring operations of a business.

5 Must Know Facts For Your Next Test

1. Extraordinary items must meet two criteria to be reported separately: they must be both unusual in nature and infrequent in occurrence.
2. Examples of extraordinary items include natural disasters, expropriations, or the cumulative effect of changes in accounting principles.
3. Extraordinary items are reported net of income taxes on the income statement, and their impact is excluded from the calculation of earnings per share.
4. The presentation of extraordinary items is regulated by the Accounting Standards Codification (ASC) 225-20, which provides guidance on their classification and disclosure.
5. The reporting of extraordinary items has become less common in recent years as the Financial Accounting Standards Board (FASB) has narrowed the definition and criteria for such items.

Review Questions

• Explain the criteria that must be met for an event or transaction to be classified as an extraordinary item.
  • For an event or transaction to be classified as an extraordinary item, it must meet two criteria: 1) it must be unusual in nature, meaning it is distinctly different from the normal, recurring operations of the business, and 2) it must be infrequent in occurrence, meaning it is not reasonably expected to recur in the foreseeable future. These criteria help ensure that extraordinary items are truly exceptional and not just part of the company's normal business activities.
• Describe the financial reporting and presentation requirements for extraordinary items.
  • Extraordinary items must be reported separately on the income statement, net of income taxes. Their impact is also excluded from the calculation of earnings per share. The Accounting Standards Codification (ASC) 225-20 provides specific guidance on the presentation and disclosure of extraordinary items, requiring companies to clearly identify and explain the nature and financial effects of these unusual and infrequent events or transactions.
• Analyze the trend in the reporting of extraordinary items and explain the reasons for this change.
  • The reporting of extraordinary items has become less common in recent years as the Financial Accounting Standards Board (FASB) has narrowed the definition and criteria for such items. This is due to the belief that the separate presentation of extraordinary items can be misleading and may not provide useful information to financial statement users. The FASB has concluded that most significant, unusual, and infrequent events or transactions can be adequately explained through the notes to the financial statements, without the need for a separate extraordinary items category on the income statement.

Related terms

Nonrecurring Items: Nonrecurring items are one-time gains or losses that are not expected to occur again in the normal course of business operations.

Discontinued Operations: Discontinued operations refer to a component of a business that has been disposed of or is classified as held for sale, representing a strategic shift in the company's operations.

Accounting Standards Codification (ASC) 225-20: The Accounting Standards Codification (ASC) 225-20 provides guidance on the presentation and disclosure of extraordinary items in the financial statements.