Under U.S. GAAP, unusual items in accounting are reported inside income from continuing operations at their full pre-tax amount, shown either as a separate line on the income statement or described in the footnotes. There is no longer a separate “extraordinary items” category below the line, and these items cannot be presented net of tax on the face of the statement.
What Counts as an Unusual Item Under Current GAAP
The old “extraordinary items” classification, which required an event to be both unusual in nature and infrequent in occurrence, was eliminated by Accounting Standards Update No. 2015-01. The FASB concluded that the two-pronged test created more complexity than clarity and that few real-world events satisfied both criteria anyway.1Journal of Accountancy. No More Extraordinary Items: FASB Simplifies GAAP
What remains in the codification, at ASC 220-20 (formerly Subtopic 225-20), is a requirement to separately report or disclose any material event that is unusual in nature, infrequent in occurrence, or both. “Unusual nature” means the event has a high degree of abnormality and is clearly unrelated to the company’s ordinary activities. “Infrequency of occurrence” means the event would not reasonably be expected to recur in the foreseeable future given the company’s specific operating environment.2FASB. ASU 2015-01 – Income Statement Extraordinary and Unusual Items (Subtopic 225-20)
Context drives the label. An earthquake loss is unusual for a manufacturer in the U.S. Midwest; a hurricane loss is arguably a normal risk of doing business on the Gulf Coast. Management applies judgment, and auditors review those judgments closely because the classification affects how analysts model future earnings.
Where the Item Goes on the Income Statement
Once an item qualifies, ASC 220-20-45-16 gives companies two options: present it as a separate component of income from continuing operations on the face of the income statement, or disclose its nature and financial effects in the footnotes. Either satisfies the standard. Companies with large, eye-catching charges tend to break them out as a line item because investors will ask about them regardless.2FASB. ASU 2015-01 – Income Statement Extraordinary and Unusual Items (Subtopic 225-20)
The charge or gain appears at its full pre-tax amount within continuing operations. Its tax effect is rolled into the company’s overall income tax expense line for the period. Footnotes typically state the pre-tax amount and let analysts calculate the after-tax impact using the company’s effective tax rate.
What the Item Cannot Look Like
The codification is firm about two things. Unusual items cannot be shown net of tax on the face of the income statement, and companies cannot show the per-share effect of an unusual item on the face of the statement either. Both restrictions exist specifically to prevent the item from looking like the defunct extraordinary items category, which used to carry its own net-of-tax presentation and EPS disclosure.2FASB. ASU 2015-01 – Income Statement Extraordinary and Unusual Items (Subtopic 225-20)
Examples That Typically Qualify
A handful of event types show up repeatedly in public filings:
- Restructuring charges tied to plant closures, workforce reductions, or organizational overhauls. Under ASC 420, a company recognizes these liabilities when the obligation actually exists, not when management merely commits to a plan, so the timing of the income statement hit depends on when specific costs are incurred or when employees are notified of termination benefits.
- Goodwill impairment. When the carrying value of a reporting unit exceeds its fair value, goodwill is written down, and GAAP requires the impairment loss to appear as a separate line item within continuing operations.3PwC. 8.8 Goodwill
- Large one-time litigation settlements or judgments that fall outside the ordinary course of business. Routine litigation reserves at a company that faces constant lawsuits, such as a large pharmaceutical manufacturer, generally do not qualify.
- Natural disaster losses, including inventory destroyed by flooding, facilities damaged by wildfire, or supply-chain disruptions from extreme weather, provided the loss is material and the event is abnormal for the company’s operating environment.
- Gains or losses on non-core asset sales, such as selling a headquarters building, divesting a minor product line, or disposing of a long-held equity investment that does not rise to the level of a discontinued operation.
When several similar items individually fall below the materiality threshold, GAAP allows them to be aggregated into a single disclosure rather than broken out one by one.
How Materiality Is Decided
Whether an item requires separate presentation or disclosure hinges on whether it is material, and there is no bright-line percentage. The SEC addressed this directly in Staff Accounting Bulletin No. 99, stating that relying exclusively on a numerical rule of thumb such as the common 5 percent benchmark “has no basis in the accounting literature or the law.”4U.S. Securities and Exchange Commission. Staff Accounting Bulletin No. 99: Materiality
Materiality requires evaluating both quantitative size and qualitative context. The core test is whether a reasonable investor’s judgment would be changed or influenced by the item’s omission or misstatement, considering the total mix of information available. A $2 million restructuring charge might be immaterial for a Fortune 100 company but highly material for a small-cap firm with $30 million in revenue. A numerically small item can still be material if it turns a profit into a loss, causes the company to miss an analyst consensus, or involves management fraud.4U.S. Securities and Exchange Commission. Staff Accounting Bulletin No. 99: Materiality
How This Differs From Discontinued Operations
Unusual items and discontinued operations are not the same category and are not reported the same way. Discontinued operations are pulled entirely out of continuing operations, presented net of tax, and placed on their own line below “Income from Continuing Operations.” Prior periods are restated so the discontinued component’s results are reclassified out of continuing operations in every year shown.5FASB. ASU 2014-08 – Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)
A disposal qualifies for that treatment under ASC 205-20 only when a component has been sold or classified as held for sale, and the disposal represents a strategic shift with a major effect on the company’s operations and financial results. Selling off an entire geographic segment, exiting a major line of business, or disposing of a significant equity method investment are the classic examples. GAAP does not define “strategic shift” with any precision, which is where many auditor-client disagreements arise.6RSM. Discontinued Operations: Identification, Presentation and Disclosure The threshold is intentionally high. Selling a single warehouse or closing one retail location almost never qualifies.
A material asset sale that does not clear the strategic-shift bar remains in continuing operations and is handled under the unusual items rules: pre-tax, on-face or in-footnote, no net-of-tax or per-share presentation on the face of the statement.
Non-GAAP Adjusted Earnings and SEC Limits
Companies and analysts often go a step further by publishing “adjusted” earnings that strip out unusual items entirely. A company might report GAAP earnings of $3.00 per share but highlight “Adjusted EPS” of $3.50 after adding back a restructuring charge. If the pre-tax charge was $10 million and the effective tax rate is 25 percent, the after-tax impact is $7.5 million, which is added back to reported net income to arrive at the adjusted figure.
Non-GAAP metrics can be useful for forecasting, but they also create room for abuse. A company that reports “adjusted” earnings every quarter, stripping out different charges each time, may be dressing up a fundamentally unprofitable business. The SEC has put guardrails in place through Regulation G and Regulation S-K Item 10(e).7eCFR. 17 CFR 229.10 – (Item 10) General
The rules require two things. Whenever a company presents a non-GAAP measure, it must present the most directly comparable GAAP measure with equal or greater prominence, rather than burying the GAAP number in a footnote while the adjusted number sits in the headline. The company must also provide a quantitative reconciliation showing exactly how the non-GAAP number was derived from the GAAP number.8eCFR. Regulation G The SEC has flagged specific violations, including using larger fonts for non-GAAP numbers, describing adjusted results as “record performance” without equally characterizing the GAAP results, and starting reconciliation tables from the non-GAAP figure rather than the GAAP figure.9Deloitte Accounting Research Tool. 3.3 Presentation of Equal or Greater Prominence