In order for an item to be considered extraordinary, it must meet the following criteria. The gain or loss experienced by the company from the transaction or event must be-
To accurately meet this criteria is company specific. In order to classify a transaction or event as unusual and nonrecurring, a company’s sphere of business and geographical location must be taken into consideration. Where the loss from a natural disaster in one area would be considered an extraordinary item in another location it may be considered a regular occurrence.
Extraordinary items are presented on the income statement between discontinued operations and the cumulative effect of a change in accounting principle. An accountant must record an extraordinary item net of its tax consequences. A net extraordinary gain (gain less additional income taxes) will increase income whereas a net extraordinary loss (loss which is reduced by income tax savings) will decrease income.
When comparing fiscal years, it is important to contrast income before extraordinary items with the net income from previous years where there were not extraordinary gains or losses. This is possible because management does not predict for the extraordinary item to happen again.
The following gains or losses cannot be treated as extraordinary items according to the accounting principles.