Definition: Extraordinary gains or losses are economic events coming from continuing operations that are both infrequent and unusual. In other words, these gains and losses stem from the normal business activities of the company, do not happen regularly, and are abnormal in nature. In order to be considered an extraordinary event, all three of these characteristics must be met.
What Does Extraordinary Gain or Loss Mean?
An infrequent event is something that almost never happens and is expected not to happen again in the foreseeable future. For example, an early spring or fall frost in Florida that destroys an orange harvest might be considered infrequent because it rarely happens. It would not be considered unusual however.
An unusual event is one that is abnormal in nature and typically outside of the company’s control. It’s a gain or loss from something that wouldn’t normally occur in the day-to-day operations of a company. For example, a tornado in Kansas that destroys building is an unusual event. It would not occur in the normal operations of the company. This is not infrequent, however, because tornadoes in Kansas happen every year.
An extraordinary gain or loss is an event that is both infrequent and unusual. For example a tornado in Michigan that destroys a factory is both infrequent and unusual. Tornadoes don’t happen in Michigan regularly and a natural disaster like this would not be in the normal operations of a factory in Michigan.
Extraordinary gains and losses are reported on the financial statements separately because we want to call special attention to them. A significant loss from a natural disaster shouldn’t deceive external users into thinking the company is performing poorly for the period.
This is why extraordinary events are reported in a separate section of the income statement independent of the normal operating income and losses.