Extraordinary Item

An extraordinary item is a one-time event that is not expected to recur in the foreseeable future. Extraordinary items are reported separately from continuing operations on the income statement. They are often used to account for events such as the sale of a business segment, a lawsuit settlement, or a natural disaster.

The criteria for an item to be considered extraordinary are:

• It must be unusual in nature.
• It must be infrequent in occurrence.
• It must not be directly related to the company's ordinary business activities.

If an item meets all three of these criteria, it is considered an extraordinary item. Extraordinary items are not subject to the same rules of conservatism as other items on the income statement. This means that they can be reported at their full value, even if there is some uncertainty about their ultimate outcome.

The presentation of extraordinary items on the income statement can be confusing. This is because they are reported separately from continuing operations, which can make it difficult to compare the company's results from one period to the next. In addition, extraordinary items can sometimes be used to manipulate earnings. For example, a company may sell a business segment at a loss and then report the loss as an extraordinary item. This can make it appear that the company is more profitable than it actually is.

For these reasons, it is important to understand the criteria for an item to be considered extraordinary and to be aware of the potential for earnings manipulation.