Unusual Expense in Accounting: GAAP, IFRS, and Disclosures

An unusual expense in accounting is a charge that falls outside a company’s ordinary business activities and is not expected to recur in the foreseeable future. Under U.S. GAAP, these items are reported within continuing operations at their full pre-tax amount, and when material, the company must disclose the nature of the event and its financial effect. The rules live in ASC Topic 225-20, and they matter because a single large write-down or restructuring charge can distort reported earnings enough to make a healthy company look troubled if a reader takes the bottom line at face value.¹

What Qualifies as Unusual or Infrequent

GAAP uses two tests. An item is “unusual in nature” when it has a high degree of abnormality and is clearly unrelated to the company’s ordinary activities. An item is “infrequent in occurrence” when it is not reasonably expected to recur in the foreseeable future.¹ An expense can be one, the other, or both.

Context matters. Both characteristics are judged against the specific company’s operating environment. A wildfire loss is unusual for a tech company in Austin but might be a foreseeable risk for a timber company in the Pacific Northwest. Litigation settlements are routine for a pharmaceutical company defending patent claims and highly unusual for a regional bakery chain.

Common examples include:

Asset impairments, where the value of equipment, real estate, or goodwill is written down because it can no longer generate enough cash to justify its book value.
Restructuring costs, including severance payments, lease termination penalties, and facility closure expenses when a company reorganizes its operations.
Large litigation settlements from major lawsuits or regulatory enforcement actions that are not part of the company’s normal legal exposure.
Natural disaster losses, covering property damage, business interruption, and cleanup expenses from floods, earthquakes, and similar events.

Where the Expense Appears on the Income Statement

Unusual or infrequent expenses are reported within results from continuing operations, not below the line. That placement means they flow directly into operating income and net income. The expense must be clearly separated from normal recurring costs like cost of goods sold or selling and administrative expenses. When the amount is material, companies typically present it as its own line item on the income statement.¹ When the amount is smaller, the company may instead disclose it in the footnotes rather than breaking it out on the face of the statement.

One rule matters especially. These expenses cannot be presented net of tax on the income statement. The charge appears at its full pre-tax amount within operating results, and the tax effect is folded into the overall income tax provision. Showing them net of tax or in a way that implies they are extraordinary items is prohibited under ASC 225-20.

The tax effect still matters for understanding the bottom-line hit. A $10 million restructuring charge, at the current 21% federal corporate rate, generates a $2.1 million tax benefit, so the actual reduction to net income is $7.9 million.² Analysts who skip this step overstate the damage. Some charges, like goodwill impairment, may not be fully deductible depending on how the original acquisition was structured, which complicates the math.

What Counts as Material

Whether an unusual expense earns its own line item or a footnote mention depends on materiality. A material amount is one large enough to influence the judgment of a reasonable investor. The SEC has made clear that no single percentage threshold is definitive, though companies and auditors commonly use a 5% of pre-tax income benchmark as a starting point.³ Other common benchmarks use percentages of revenue or total assets, but Staff Accounting Bulletin No. 99 is explicit that these rules of thumb cannot substitute for a full analysis of all relevant circumstances. A smaller dollar amount might still be material if it involves management self-dealing or masks a change in trend.

Required Disclosures in the Footnotes and MD&A

When an unusual or infrequent expense is material, GAAP requires disclosure of the nature of the event and its financial effect, either on the face of the income statement or in the footnotes.¹ In practice, most companies use both: a separate line item on the income statement plus a footnote explaining what happened, why, and which business segments were affected.

The SEC adds another layer. Item 303 of Regulation S-K requires the Management’s Discussion and Analysis section of annual and quarterly reports to describe any unusual or infrequent events that materially affected reported income from continuing operations and to explain the extent of that impact.⁴ MD&A must also disclose known trends or uncertainties reasonably likely to cause a material change in the relationship between costs and revenues. That’s where companies are supposed to flag, for example, that additional restructuring charges may come in future quarters or that an impairment review is ongoing for another reporting unit.

The SEC calls these early-warning disclosures. If a company knows it may face future impairment charges, covenant issues, or additional litigation costs, Item 303 requires disclosure even before those costs hit the income statement.

The Old “Extraordinary Item” Category No Longer Exists

Before 2016, GAAP had a higher-bar classification called an extraordinary item. To qualify, an event had to be both unusual in nature and infrequent in occurrence, and it appeared in a separate section of the income statement, below income from continuing operations and net of its tax effect. The FASB eliminated the concept in Accounting Standards Update 2015-01, effective for fiscal years beginning after December 15, 2015.¹ Events that would once have qualified as extraordinary are now simply reported as unusual or infrequent items within continuing operations, and the disclosure rules for those items were expanded to compensate.

How Analysts Adjust for Unusual Charges

Reported net income that contains a large unusual charge is a poor predictor of future performance. Analysts respond by normalizing earnings: stripping out the unusual expense to estimate what the company’s sustainable earning power looks like without the one-time event. That normalized figure feeds into most valuation metrics.

A large impairment charge reduces net income and EBIT, which inflates the price-to-earnings ratio and can make a stock look more expensive than its underlying economics warrant. Non-cash charges like goodwill impairment are routinely added back to EBITDA because they don’t represent cash leaving the business. Cash-based unusual charges like severance payments or settlement costs are trickier: the cash actually left, so some analysts adjust EBITDA but leave free cash flow unadjusted for the period.

The harder call is a charge that is unusual but not truly one-time. A company that restructures a division every five years has a pattern, even if any single restructuring is legitimately unusual. Experienced analysts handle this by modeling a normalized recurring charge rather than pretending it will never happen again.

The SEC’s Guardrails on Non-GAAP Adjustments

Stripping unusual expenses out of reported earnings creates a non-GAAP financial measure, and the SEC regulates those measures heavily. Regulation G requires that whenever a company publicly discloses a non-GAAP measure, it must simultaneously present the most directly comparable GAAP measure and provide a quantitative reconciliation showing how it got from one to the other.⁵ In SEC filings, Item 10(e) of Regulation S-K adds further requirements: the GAAP measure must be presented with equal or greater prominence, and management must explain why the non-GAAP measure provides useful information to investors.⁶

The sharpest rule targets a specific abuse. Item 10(e) prohibits adjusting a non-GAAP performance measure to eliminate items labeled non-recurring, infrequent, or unusual if a similar charge or gain occurred within the prior two years or is reasonably likely to recur within the next two years.⁶ A company that takes restructuring charges three years running cannot call them non-recurring. SEC staff has also noted that stripping out charges but not offsetting gains from the same period can be misleading under Regulation G.⁷ The agency has brought enforcement actions against companies for inflating adjusted results by improperly classifying routine operating expenses as non-recurring, resulting in penalties and forced changes to future filings.

Impact on Debt Covenants

Unusual expenses can also trigger operational crises through debt covenants. Most commercial loan agreements include financial maintenance covenants tied to ratios like debt-to-EBITDA or interest coverage. A large unusual charge that flows through to reported EBITDA can push a borrower into technical default even if the underlying business is performing well.

Loan agreements typically address this by defining a covenant EBITDA that differs from the standard financial statement version. Many agreements allow certain extraordinary or non-recurring charges to be added back, but the specifics are heavily negotiated. Some deals exclude unusual items from the net income calculation entirely; others require lender consent before a specific expense can be treated as non-recurring. The classification of an expense as unusual versus ordinary is often a point of contention between borrowers and lenders.

The consequences of a breach cascade quickly. The lender may reclassify the debt as current on the balance sheet, accelerate repayment, or restrict additional borrowing, and cross-default provisions in other loan agreements can compound the problem. Companies that anticipate a large unusual charge should engage their lenders in advance, as a proactive borrower is far more likely to negotiate a waiver or amendment than one that surprises its lender with a covenant violation in the quarterly compliance certificate.

How IFRS Handles the Same Items

Companies reporting under International Financial Reporting Standards face a different framework. IAS 1 prohibits presenting any items of income or expense as extraordinary in the financial statements or in the notes. There is no extraordinary item concept under IFRS. When income or expense items are material, IAS 1 requires the company to disclose their nature and amount separately.⁸ The practical effect is close to current GAAP: unusual expenses get disclosed and separated but live within continuing operations without special below-the-line treatment. For investors comparing companies across jurisdictions, post-2015 GAAP and IFRS are now largely aligned on this point.

1
Financial Accounting Standards Board. Accounting Standards Update 2015-01 – Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
2
Congressional Budget Office. Increase the Corporate Income Tax Rate by 1 Percentage Point
3
U.S. Securities and Exchange Commission. Staff Accounting Bulletin No. 99 – Materiality
4
eCFR. 17 CFR 229.303 – (Item 303) Managements Discussion and Analysis
5
eCFR. 17 CFR Part 244 – Regulation G
6
eCFR. 17 CFR 229.10 – (Item 10) General
7
U.S. Securities and Exchange Commission. Non-GAAP Financial Measures (Corporation Finance Interpretations)
8
IFRS Foundation. IAS 1 Presentation of Financial Statements