One among irregular items that gets special accounting consideration is an extraordinary event. An extraordinary item is a transaction or event that is both unusual and infrequent in occurrence, taking into account the environment in which the company operates.
According to APB Opinion 30, paragraphs 30–32:
- Unusual nature means the underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates.
- Infrequency of occurrence means the underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates.
The APB was clear in suggesting that specific characteristics of the entity, such as type and scope of operations, lines of business, and operating policies should be considered in determining ordinary and typical activities of an entity. The environment in which an entity operates is a primary consideration in determining whether an underlying event or transaction is abnormal and significantly different from the ordinary and typical activities of the entity. The environment of an entity includes such factors as the characteristics of the industry or industries in which it operates the geographical location of its operations, and the nature and extent of governmental regulation.
For example: assume two companies sustain significant flood loss damage. One company might classify the loss as extraordinary, yet the other might not. Flood loss sustained by an enterprise located in a flood plain would not constitute an unusual occurrence and would not warrant extraordinary classification, nor would an earthquake loss for a company located in California.
One extraordinary item addressed by the FASB is the economic affect of the September 11, 2001, terrorist attack on the World Trade Center and the Pentagon. Certain businesses, as a consequence of the attack, have sustained significant personnel losses and severe economic damage. Many of these companies, as well as associated businesses, were forced to report extraordinary losses in their 2001 current year financials.
Another item, known as “a corporate restructuring charge“, may appear to be unusual or infrequent but is still reported as a component of continuing operations. The FASB considers organizational restructuring a part of today’s normal business environment. However, restructuring charges, if material, can be shown as a separate line item.
For example: Sara Lee Corporation experienced a $2,040 million restructure in fiscal year 1998. As a result, Sara Lee reported a loss before income taxes of $443 million. Had the restructuring charge not been taken, it would have earned a profit before income tax of $1.597 million. Many companies use pro-forma-reporting techniques as a means of softening the effects of reported restructuring changes. They essentially highlight what earnings would have been had they not experienced a corporate restructure. Many believe that this type of reporting is misleading and helps to disguise management shortfalls.