Definition: An unusual gain or loss is an abnormal gain or loss that is typically unrelated to a business’ ordinary operations. In other words, this is a gain or loss that normally would not occur in the day-to-day operations of a business.
What Does Unusual Gain or Loss Mean?
The unusual characteristic is the first requirement of an extraordinary reporting item. In order for an unusual gain or loss to be considered an extraordinary item, it must be both unusual and infrequent.
This means that the gain or loss happened outside of the company operations and will most likely never happen again.
An example of an extraordinary item is an unlikely natural disaster, for example an earthquake in Michigan. Michigan doesn’t get earthquakes because the fault lines aren’t near the state. Thus, if Jim’s Machine Shop was hit with an earthquake and his building collapsed, it would be considered an extraordinary event. It was a loss caused by something outside of Jim’s normal operations and it is infrequent.
If Jim’s shop was located in southern California; however, this would not be considered extraordinary. Remember an extraordinary item must be both unusual and infrequent. Earthquakes in California happen every few years. They are actually quite frequent.
Extraordinary items are reported in a separate section of the income statement because it allows creditors and investors to look at the operations separated from these one-time occurrences.
If the unusual gain or loss is only unusual and not infrequent, it should be reported in the continuing operations section after the normal revenues and expenses. This way users of the financial statements see that it could be a frequent event, but it most likely will not happen regularly.