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Sunday, February 12, 2012

Extraordinary items vs. Exceptional items

If you ever confused between exceptional items and extraordinary items while analyzing  financial statements of a particular company this post shall give you pretty clear idea about the difference between them.
Exceptional items are part of a company’s ordinary course of business (normal business operations) and are mentioned in company’s financial statements. These items are often frequent (in comparison with extraordinary items) in nature.

If main debtor of a company goes broke then it is reported as the exceptional item due to the bigger amount attached to it, else it is considered normal if a smaller debt turns into NPA (Non Performing Assets) and it is not reported separately as exceptional item.

While extraordinary items are infrequent and unusual in nature .These items are reported separately from normal accounting statements. Even if mentioned in the accounting statements these items turn up after the calculation of the  net profit.

Extraordinary items as the name suggests are not related to ordinary  business operations like losses due to strike in the factory, gain on sale of any asset which is a rare incidence and does not occur on regular basis, losses incurred due to natural disasters ,frauds committed in the company.
Losses incurred by an airlines company due to a plane crash shall fall under ‘extraordinary items’.

Exceptional items are reported before Net Profit and thus affect the Net Profit. Extraordinary items are reported after the net profit so that investor can extrapolate the performance of the company without considering extraordinary items (which occur rarely). Some accounting guidelines allow skipping of extraordinary items.

Treatment of  these items are different under accounting guideline of  GAAP ,IFRS etc. and this post is to give the basic difference between these two terms.


Madhan Kumar said...

Thanks for the effort taken to explain so clearly.

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