Extraordinary Items

Extraordinary Items is a line item on an income statement of a company prepared under US GAAP below Income from Discontinued Operations. It represents net of tax amounts related to unusual and infrequent events. Items are unusual in the context of a company's business and its environment. Items are infrequent if they are not reasonably expected to reoccur in the near future. An event needs to be both unusual and infrequent in order to qualify as an extraordinary item.

Unusual and infrequent events are shown as extraordinary items in order to help users distinguish the recurring income and expense from nonrecurring income and expense.

Classification of events as an extraordinary item on income statement is not allowed under IFRS.

Few examples of extraordinary items are:

  1. A hurricane in a region that has a history of hurricanes is not an extraordinary item because it could reasonably be expected to reoccur.
  2. Purchase of assets for less than their fair value in a business combination is an unusual and infrequent event because we are not sure whether the company will have such opportunity is future.
  3. A loss due to seizure of property by government is an extraordinary item because it is unusual and infrequent in a democracy.

Example

Company A has after tax income from continuing operations of $240 million, no income or loss from discontinued operations and a before tax loss of $30 million due to seizure of property by government. Tax benefit @ 20% would be applicable to the extraordinary loss. The relevant portion of income statement would be as follows:

Company A
Income statement
For the financial year ended 31 December 2011
 millions
Income from continuing operations240
After tax loss on extraordinary items (30×0.8)-24
Net income for the year216

Written by Obaidullah Jan, ACA, CFA