Definition:

Extraordinary Items refer to gains or losses in a company's financial statements that are both unusual and infrequent in nature.

An Accounting Change refers to a change in accounting principle, accounting estimate, or the reporting entity that impacts the financial statements.

Examples

Extraordinary Items: Natural disasters causing significant damage, expropriation of assets by a foreign government.

Accounting Change: Switching from the straight-line method to the declining balance method for depreciation, changing the method of inventory valuation from FIFO to LIFO.

Formula:

There is no specific formula for Extraordinary Items or Accounting Changes as they are qualitative adjustments in financial reporting.

How to use the metric:

Extraordinary Items are used to assess the impact of unusual and infrequent events on a company's financial performance.

Accounting Changes are used to ensure that financial statements reflect the most accurate and relevant information based on new insights or standards.

Limitations:

Extraordinary Items can distort a company's financial performance if not properly identified and disclosed.

Accounting Changes can complicate financial analysis due to a lack of consistency across periods.

Applies to:

Extraordinary Items and Accounting Changes apply to all industries, as every company may encounter unusual events or need to update accounting practices.

Doesn't apply to:

There are no specific industries where these concepts do not apply, but industries with stable operations and fewer external disruptions might encounter extraordinary items less frequently.

Summary:

Extraordinary Items and Accounting Changes are important concepts in financial reporting that help provide a clearer picture of a company's financial performance and position by accounting for unusual events and updating accounting practices. While they apply universally, their impact and frequency can vary across industries.