Definition of Extraordinary Items
Extraordinary Items are the transactions or events that are a rare occurrence in the business organization but has a material value & effect to the profit & loss of the organization for the period of occurrence and the effect of the same on the profit & loss statement are shown separately in the financial statements of the organization.
There are certain events that occur sometimes in the business organization that is not related to day to day business operations instead they are not frequent and unusual in nature but prove material to the profit & loss derived by the organization during that period of occurrence. These items & events are shown separately in the financials of the company and are termed as ‘Extraordinary Items’. These extraordinary events could prove to be profitable for the business by boosting the profit of that period or even could prove liability for the business as could result in decreasing the profit of that period or increasing the loss of that period.
Features of Extraordinary Items
These Extraordinary items which are to be presented separately in the financials of the company should need to have some of the following attributes:
1. Events Should Be Separate, Unusual & Infrequent in Nature
The main & highlighting feature and characteristics of the extraordinary items are the unusual and infrequent occurrence of the transaction. These transactions are un-anticipated and don’t happen frequently. These are separate events and transactions other than the daily transactions of the business which carried out for smooth running of the business on daily basis.
2. Events and Transactions are Material in Nature
The Materiality characteristics of the event is one of the mandatory features. The materiality of the transaction qualifies the transaction to be highlighted in the financial statement of the entity as a separate point because of the material effect of the same in the profit & loss made by the company for the relevant period and the same need to be communicated to the users of the financial statement for true & fair view of the relevant facts mentioned in it.
Examples of Extraordinary Items
The following are some of the events that could be considered as an extraordinary item in most of the business organization:
- Losses experienced by the business organization due to the natural hazards or natural calamities like earthquakes or floods etc.
- Losses experienced by the business organization due to un-precedential cessation of business operation due to sudden strikes by the employees or labor forces.
- A gain arising from the sale of non-performing units or parts of the business organization results in the sudden increase in the profit arising in the business which is not a common day trading or transaction within the business etc.
Interpretation of Extraordinary Items
Extraordinary items could also be termed as non-recurring transactions that do not occur frequently in the course of business. These events or transactions have a material impact on the financials of the company during the period of occurrence. These extraordinary items are mentioned or represented separately because it shows the users of the financial statement that the unusual increase or decrease in usual profit or loss in the business is due to some unprecedented transactions that occur during the period and it does not happen frequently. Hence the unusual profit & loss figure arising from the effect of extraordinary items is a onetime thing and should not be thought as a change in profit and loss arising from the day to day business activities.
Disclosure of Extraordinary Items
In earlier days, till 2015 the extraordinary items are to be disclosed in the Profit & Loss statement of the organization just after the calculation of profit & loss arising from the day to day running of the business and the net impact on the profit & loss for that period is evaluated. The same is also reflected in the earnings per share calculation. But it was concluded that it is necessary to present the impact of the extraordinary items on the financials of the company but the presentation of the same in the front of the income statement does not change anything. Hence the presentation of the extraordinary items changed a little bit and nowadays the same is shown in the footnotes of the financial statement. With the proper disclaimer of the extraordinary items, the change brought upon the earning per share of the company due to the extraordinary items is also need to be disclosed.
Importance of Extraordinary Items
There is fair importance of the extraordinary items, some of them are as follows:
- The disclosure of extraordinary items shows the true & fair presentation of the financial statements of the company and helps the company to comply with the statutory rules & regulations.
- The presentation of the extraordinary items separately does not provide a confusing record of the status of the running of the business. In case of loss arising from the extraordinary items, the presentation of the same separately helps the company to show that there is nothing wrong with the normal running course of the business but the extraordinary event was the reason for the loss.
- The separate presentation of the extraordinary items helps in the evaluation of the same during the calculation of the tax liability of the company and taking effects of the extraordinary items in the evaluation of the tax payable by the company for the same period.
Advantages of Extraordinary Items
There is an immense advantage to the company for presenting the extraordinary events or items separately in the financial statement.
- In case of loss arising from the extraordinary event, the separate presentation of the same saves the impact of the same in the normal figure of the business in its financial statements and prevent the reputation or goodwill of the company from any downfall in the image of the company in such a competitive market.
- The presentation of the extraordinary items separately puts the focus on the profit & loss of the business in the next accounting period as the actual impact of the extraordinary event on the normal course business activities could be seen in the following period which determines the reactions of the users of the financial statement of the company.
The extraordinary event could have a material impact on the financials of the business and could have a very negative impact on the normal running course of the business. As the destruction of the factory of the company due to any natural hazards could put a question on the going concern of the business for the same period or the following period. Hence the presentation of extraordinary events with the full information is important for the government as well as all the users of the financial statements of the company.
This has been a guide to Extraordinary Items. Here we discuss the features, Interpretation, Disclosure, Importance, Advantages, and examples along with detailed explanations. You can also go through our other suggested articles to learn more –