Extraordinary Items 3

Extraordinary Items

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Overview of Extraordinary Items

An extraordinary item is an event or transaction that is distinguished by both its unusual nature and the infrequency of its occurrence. Something is considered to be unusual if it represents a high degree of abnormality and is unrelated to an entity’s typical activities. Something occurs infrequently if you do not reasonably expect it to recur in the foreseeable future. Examples of extraordinary items are:

• A tornado destroys crops, in an area where tornado damage is rare
• An earthquake destroys a building
• A hurricane destroys a business in an area where there is no record of hurricane damage

Items that are not considered to be extraordinary are:

• Adjustments to accruals on long-term contracts
• Asset disposal gains or losses
• Effects of a strike
• Foreign currency transaction gains or losses (including currency devaluations and revaluations)
• Remaining excess of the fair value of acquired net assets over cost
• Write-downs of accounts receivable, inventory, deferred research and development costs, and other intangible assets

The following are examples of events that are not extraordinary:

• A farmer’s grapes are destroyed by frost in an area where frost damage is relatively common.
• A company is unable to complete a public equity registration.
• A company incurs costs to defend itself from a hostile takeover.

Disclosure of Extraordinary Items

If you classify an item as extraordinary, then classify it separately in the income statement if it is material in relation to the income before extraordinary items, or to the trend of annual earnings before extraordinary items. You should make this decision for individual items, and not in aggregate for multiple items.

Extraordinary items should be segregated from the results of ordinary operations and shown separately in the income statement, using the following format:

Income before extraordinary items	$XXX,XXX
Extraordinary items (less applicable taxes of $___) (Note XX)	X,XXX
Net income	$XXX,XXX

In the accompanying notes to the financial statements, disclose the nature of the extraordinary event and the principal items entering into its determination as an extraordinary item, as well as the related amount of income taxes. Also, if earnings per share disclosure is required, then separately disclose the earnings per share  for extraordinary items.