On the Income statement, incoming revenues and outgoing expenses are generally classified as either "operating" gains and losses or "non-operating" gains and losses.
Operating gains and losses are, quite simply, revenues and expenses resulting from operating in the compay's normal line of business. However, this article is concerned with the Income statement treatment of the other major revenue and expense category, non operating gains and losses.
The Income statement categorization of non operating items is (as of late 2015) undergoing change under International Financial Reporting Standards (IFRS) and under United States Generally Accepted Accounting Principles (US GAAP) . Until 2015, the major categories of non operating items have included Extraordinary items, Non recurring items, and (for companies not in financial services), Financial gains and losses. What is changing, however, is the need to distinguish between Extraordinary items and Non recurring items.
An extraordinary item is a material expense or revenue item characterized by both its unusual nature and infrequency of occurrence. Extraordinary items are usually viewed as "one-time" events. A company that is not in the real estate business, for instance, may report an extraordinary gain or extraordinary loss from selling a building.
Extraordinary items and their tax consequences appear on the Income statement, separately from revenues and expenses for ordinary income, financial income, and income from discontinued operations. Extraordinary items usually appear after these other categories, near the bottom of the statement. The example Income statement below shows the typical handling of extraordinary items.
Accountants may devote substantial time and effort deciding whether a given gain or loss may be considered extraordinary. The handling of extraordinary items can be quite different between countries, and it should be remembered that Internataional Financial Accounting Reporting Standards (IFRS) does not recognize the extraordinay item concept.
United States accounting standards, for instance, do recognize extraordinary items. US Financial Accounting Standards Board (FASB) statement 145 provides guidance in deciding whether or not an item can be classified as extraordinay. However, accountants everywhere, including the United States, should remember that local standards may make a fine distinction between extraordinary items, on the one hand, and on the other hand slightly different handling of so-called nonrecurring items or exceptional items. The proper handling of these three categories calls for accurate knowledge of local accounting standards and tax laws.
Regarding extraordinary gains and losses under US accounting standandards,
- Extraordinary gains on the Income statement may result, e.g., from the following:
- Gains from the sale of assets, e.g., land, buildings, machinery, aircraf, vehicles.
- Gains from early retirement of debt.
- Winning a law suit..
- Extraordinary losses may result from
- Losses from from the sale of assets, such as land, buildings, machinery,
aircraft or vehicles.
- Re-structuring costs that come with laying off employe.e
- Costs acquired from losing law suits.
- Costs of writing down intangible assets or good will.
- Loss from natural disasters (e.g, lightning, earthquakes, volcanic eruption)
where such events are very, very rare.
Note however, that losses from writing off bad debt, or from devaluing inventory, normally cannot be classified as extraordinary losses even where such losses are rare. Such losses are, strictly speaking, still part of the company's normal operating business.
Losses due to natural disasters may or may not qualify as extraordinary loss, depending how "extraordinary" the disaster. Crop loss due to frost, for instance, would qualify as an extraordinary loss in Canada, or even in Florida, because killing-frosts do occur in those places. Crop loss due to frost in the tropics, however, are much rarer and would qulify as extraordinary loss.
In any case, extraordinary gains may in some cases incur a capital gains tax, whereas extraordinary losses may reduce reported taxable earnings, thereby bringing a tax savings.
Example Income statement with extraordinary items
Example Income Statement with Extraordinary Items listed near the bottom. Note that a separate section for extraordinary items is no longer required by International Financial Reporting Standards (IFRS) or United States GAAP.