Definition:

Extraordinary Items are gains or losses in a company's financial statements that are infrequent and unusual in nature. These items are separated from regular income to provide a clearer picture of a company's ongoing operational performance.

Examples

Examples of Extraordinary Items might include losses from natural disasters, expropriation of assets by a foreign government, or gains from the sale of a business segment.

Formula:

There is no specific formula for calculating extraordinary items, as they are identified based on their unusual and infrequent nature. They are typically reported separately on the income statement.

How to use the metric:

Extraordinary Items are used by analysts and investors to assess a company's core operational performance by excluding these irregular events from the analysis. This helps in understanding the sustainable earnings of a company.

Limitations:

The main limitation is the subjective nature of what constitutes an "extraordinary" item, which can lead to inconsistencies in reporting. Additionally, changes in accounting standards have largely eliminated the separate reporting of extraordinary items, requiring them to be included in income from continuing operations.

Applies to:

Historically, Extraordinary Items could apply to any industry, particularly those prone to unusual events, such as insurance or natural resources. However, due to changes in accounting standards, this classification is no longer used.

Doesn't apply to:

Currently, the concept of Extraordinary Items does not apply to any industry due to changes in accounting standards (e.g., FASB's ASU 2015-01), which require all items to be included in income from continuing operations.

Summary:

Extraordinary Items were once used to separate unusual and infrequent gains or losses from regular business operations in financial statements. However, due to changes in accounting standards, this classification is no longer used, and all items are included in income from continuing operations. This change aims to improve consistency and comparability in financial reporting.