What is an Unusual Item?
An unusual item is a nonrecurring or one-time gain or loss that is not considered part of normal business operations. Unusual gains or losses may be recorded on the income statement as a separate component of income from continuing operations, or alternatively, may be identified in the footnotes to the financial statements or the management discussion and analysis (MD&A) section of the annual report.
Understanding Unusual Items
Reporting unusual items separately is important to ensure the transparency of financial reporting. Because unusual items are unlikely to recur, separating these items — either explicitly on an income statement or in the management discussion and analysis (MD&A) or footnotes — allows investors to better assess the income-generating capacity of the core business activities.
Unusual items may include:
- restructuring charges inclusive of severance pay and factory closings
- asset impairment charges or write-offs
- losses from discontinued operations
- losses from early retirement of debt
- M&A or divestiture-related expenses
- gains or losses from sale of assets
- gains or losses from a lawsuit
- damage costs or slowdown of operations due to a natural disaster
- charges stemming from changes in accounting policy
The Financial Accounting Standards Board (FASB), the independent nonprofit organization responsible for issuing generally accepted accounting principles (GAAP), has given management leeway to provide a more descriptive separate line item on the income statement when appropriate, such as “Loss from Hurricane Damages to Office Building.”
The treatment of unusual items has several implications related to the analysis of company performance and valuation of its shares, credit agreements, and executive compensation schemes. An analyst would have to make adjustments to the income statement to produce a “clean” EBIT, EBITDAand net income figures on which to calculate price multiples. Debt agreements would have to specify the exclusions to how certain covenants are calculated. Executive pay plans, too, would need to explain how unusual items are handled in compensation formulas.