Extraordinary items are events and transactions that are unusual in nature and infrequent in occurrence. Unusual in nature implies that the event or transaction is, at most, incidentally related to a firm’s typical operations. Infrequent in occurrence suggests that the item is not expected to recur in the foreseeable future. Extraordinary items usually include natural disasters and actions by foreign governments, such as expropriation of assets. Separate disclosure of extraordinary items enables analysts to make better projections of a firm’s future operations.
Exhibit below shows a partial income statement for a California-based company, American Enterprises, Inc. (AE) and an accompanying note. It shows that AE lost a building in an earthquake, which meets the criterion of being unusual in nature. A question arises as to whether they are expected to recur in the foreseeable future. In California, earthquakes continue to occur with some regularity. This is another accounting situation that requires judgment. Evidently, AE and its auditors feel that earthquakes in their area occur with sufficient irregularity that they are not expected to recur in the foreseeable future. Based on the footnote disclosures, analysts can exercise their own judgment about reported extraordinary items.
Exhibit below shows a partial income statement for a California-based company, American Enterprises, Inc. (AE) and an accompanying note. It shows that AE lost a building in an earthquake, which meets the criterion of being unusual in nature. A question arises as to whether they are expected to recur in the foreseeable future. In California, earthquakes continue to occur with some regularity. This is another accounting situation that requires judgment. Evidently, AE and its auditors feel that earthquakes in their area occur with sufficient irregularity that they are not expected to recur in the foreseeable future. Based on the footnote disclosures, analysts can exercise their own judgment about reported extraordinary items.
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Note also that AE recognized a gain. A gain arose because the proceeds from the insurance settlement exceeded the carrying value of the building. Recall that buildings are carried in the accounting records at depreciated historical cost, which does not reflect current market values. When making predictions about AE’s future income levels, most analysts would remove the extraordinary gain from AE’s reported net income:
