A State By State Accounting Guide

Accounting for Extraordinary Items

Posted November 3rd, 2012 by admin and filed in Uncategorized

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-

  1. Unusual. This means it is unrelated to the business’ normal enterprises.
  2. Nonrecurring.  This means this type of transaction or event is not expected by management to transpire again.

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.

Recording Extraordinary Items

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.

Excluded Gains or Losses

The following gains or losses cannot be treated as extraordinary items according to the accounting principles.

  • Gains or losses related to foreign currency exchanges
  • Losses from the write-down or write-off of receivables, inventories, equipment, or intangible assets
  • Gains or losses from the sale of a portion of the business
  • Losses from strikes by employees
  • Gains or losses from the sale or desertion of property, plant or equipment

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