An extraordinary item, in accounting, refers to a significant event or transaction that is both unusual in nature and infrequent in occurrence. Extraordinary items are typically disclosed separately on a company’s income statement to ensure that users of financial statements can distinguish them from the core operating activities of the business. The designation of an item as extraordinary has implications for financial reporting, as it allows for its separate presentation and analysis.

Here are key characteristics and considerations related to extraordinary items:

1. **Unusual in Nature:**
– An extraordinary item is an event or transaction that is considered highly abnormal and unrelated to the ordinary and typical activities of the business. It should be both unusual and infrequent.

2. **Infrequent in Occurrence:**
– The occurrence of the item should be rare. It is not expected to happen frequently, and its infrequency distinguishes it from the regular course of business operations.

3. **Separate Presentation:**
– Extraordinary items are presented separately on the income statement, typically below the net income from continuing operations. This separation helps users of financial statements understand the impact of these unusual events on the company’s financial performance.

4. **Examples of Extraordinary Items:**
– Natural disasters (earthquakes, floods) affecting the company’s operations.
– Expropriation of assets by a government.
– Significant write-down of assets due to impairment.
– Gains or losses from extinguishment of debt under unusual circumstances.

5. **Impact on Net Income:**
– The amount associated with the extraordinary item is reported net of taxes. The impact of an extraordinary item on net income is calculated after deducting applicable income taxes.

6. **Disclosure Requirements:**
– Companies are required to disclose the nature and amount of extraordinary items in their financial statements. This transparency helps users of financial statements understand the reasons for the unusual and infrequent events.

7. **Changes in Accounting Standards:**
– Under generally accepted accounting principles (GAAP) in the United States, the term “extraordinary item” has been eliminated since the issuance of Accounting Standards Codification (ASC) Topic 225. Instead, companies are encouraged to separately disclose items that are unusual and infrequent.

8. **International Financial Reporting Standards (IFRS):**
– IFRS does not specifically use the term “extraordinary item.” Instead, IFRS requires entities to disclose material items that are not representative of the entity’s ongoing activities separately.

9. **Subjectivity in Determination:**
– Determining whether an item qualifies as extraordinary involves a degree of subjectivity. Companies and auditors use judgment to assess the unusual nature and infrequency of an event.

10. **Impact on Financial Analysis:**
– Analysts and investors may exclude extraordinary items when analyzing a company’s ongoing performance to gain insights into the core operating activities.

It’s important to note that the treatment of extraordinary items may vary based on accounting standards and regulations in different jurisdictions. While the term “extraordinary item” may no longer be used in some accounting frameworks, the concept of separately disclosing significant, unusual, and infrequent events remains important for financial transparency and analysis.