What Is an Exceptional Item?
An exceptional item is a charge incurred by a company that must be noted separately in its financial report in accordance with Generally Accepted Accounting Principles (GAAP). Despite the name, such items are considered to be ordinary business charges but they must be separated out for the sake of financial reporting clarity.
- An exceptional item is noted separately to avoid confusion with routine business income and expenses.
- A sale of assets or a legal settlement are examples.
- Exceptional items and extraordinary items are often confused, but they are recorded differently.
Don’t confuse exceptional items with extraordinary items. Both are unusual expenses or sources of revenue that are large enough to have an impact on the financial results. However, extraordinary items are not part of a company’s ordinary business dealings. Exceptional items are.
Both of these accounting items must be documented to provide investors and regulators with accurate and informative financial statements.
Both also are usually one-time events.
Understanding the Exceptional Item
An extraordinary item on a balance sheet indicates a substantial gain or loss that is unlikely to be repeated. It is not part of the company’s day-to-day business. It also must be “material.”
That is, it has a significant impact on the company’s profit or loss for the relevant period. The sale of a parcel of real estate could qualify.
Exceptional items are costly events that have an impact on a company’s bottom line but must not be misread as gains or losses in routine business operations
An exceptional item is also a large number with a substantial impact on the company’s profit or loss, but it is closely related to its day-to-day business. For example, if a company undertakes a major restructuring, cutting staff and merging divisions, the costs of that operation will be recorded as an exceptional item.
In both cases, these numbers are properly reported to shareholders as separate items. This is so that they cannot be misread as a sudden surge in the company’s sales or costs.
An exceptional item is reported separately so that it cannot be mistaken for a sudden bump (or drop) in revenue.
In fact, exceptional items usually appear on a company’s balance sheet while extraordinary items are disclosed in the notes to the financial statement.
Example of an Exceptional Item
As an example, in early 2016, a British engine manufacturer announced it would be taking an exceptional restructuring charge of GBP 75 million to GBP 100 million to account for the costs of shoring up its balance sheet through job cuts. As a special charge, this doesn’t rise to the standard of extraordinary but it does rate as an exceptional charge for the sake of financial statement transparency.
In addition to restructuring costs, examples of exceptional items might include the costs of discontinued operations, legal settlements, and disposal of assets. The retooling of a manufacturing facility might also qualify as an exceptional item.