Unusual and Infrequent Items
Under US GAAP, items of unusual and/or infrequent nature are presented in the income statement as a separate component of income from continuing operations or disclosed in the notes. Under IFRS, there is no separate classification of unusual and/or infrequent items.
Neither IFRS nor US GAAP allow classification of any item as an extraordinary item in the income statement. Previously, US GAAP allowed classification of certain items as ‘extraordinary items’.
An item is unusual if both of the following criteria are met:
- It possesses a high degree of abnormality.
- It is clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the reporting entity, taking into account the environment in which it operates.
An item is infrequent if it is not reasonably expected to recur in near future.
Classification of an item as unusual and infrequent depends on the circumstances and environment of the company. An item might be unusual for one entity but not for another. The classification depends on scope of operations, line of business, industry, geographic location, etc.
The impact of unusual and/or infrequent items are shown separately to help users distinguish the recurring income and expense from nonrecurring income and expense and make more accurate projections.
- A mild hurricane in a region that has a history of mild hurricanes is not an extraordinary item because it could reasonably be expected to recur. However, if the hurricane is of record-breaking nature, it may be an unusual event.
- If a holding company carried out 20 acquisitions in past 10 years and recorded goodwill on each of them (because the consideration exceeds fair value of net assets), but in the current year there was a bargain purchase (i.e. an acquisition in which the fair value of net assets exceeded the purchase consideration), it might qualify as an infrequent event because bargain purchases are not the norm.
- If a holding company has 300 subsidiaries globally and it disposes off a couple companies during a year, the gain or loss might not be unusual or infrequent because the company’s main operations involve acquisition and disposal of subsidiaries.
- A loss due to seizure of property by the government is both unusual and infrequent because such an event rarely occurs in a democracy.
- Costs arising from restructuring costs are infrequent and unusual because restructurings do not occur on a routine basis.