What is the difference between Exceptional item and Extraordinary item?

So far International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs) have not defined such terminologies. However, apparently these terms seem to have different treatments according to accounting standards especially IAS 1 in which extraordinary items and material items (also referred as exceptional items) have been discussed separately under different paragraphs.

These terms are mostly confused because of mixing two different things together i.e. Generally Accepted Accounting Principles (GAAPs) of USA and International Accounting Standards (IASs). This confusion thickens due to fact that the accounting history and much of the development of what we are studying now a days in form of accounting standards is actually based on accounting history inside USA. Especially Enron incidence which not only raised many questions but also became a reason to have many standards that we have today.

Coming back to the question, extraordinary items and exceptional items are two different things. And in order to differentiate I will be taking some help from US GAAP.

According to US GAAP extraordinary item is any activity or event is:

  • infrequent in nature
  • unpredictable/unusual
  • and so material in amount that it cannot be reported in aggregate with other amounts

As per US GAAP, to classify an event as extraordinary event it must qualify all three conditions. Under US GAAP such items should be reported separately from usual line items or usual incomes and expenses so that users financial information are not confused and also other measures based on profit are not distorted. In simple words it is reported after profits from regular operations.

However, IAS 1 clearly states that an entity cannot present any items of income or expense as extraordinary item in financial statements. [Reference: IAS 1 | Para: 87]. Which means nothing can be classified as extraordinary item. Or simply no such thing exists under IASs.

But it does not mean that entity cannot report or disclose such events in the financial statements. According to paragraph 85, 97 and 98 of IAS 1 we can understand that such activities which are material and/or infrequent (as exemplified under para 98) then they should be disclosed separately. Such items are termed as material items or exceptional items.

Thus, it means, that the term extraordinary is basically redundant as the term “material items” is doing that job now rather better then the term “extraordinary items”. And for the same reason not used any more especially in literature and financial statements based on International Accounting Standards.

The point is by introducing the provisions regarding material items (exceptional items), scope has widened up and is not restricted only to infrequent and unusual items (accidents and natural calamities) as it is the case under US GAAP, but it also includes those items which are infrequent but usual (termed as non-recurring items under US GAAP) and accordingly both can be reported separately, if such separate disclosure results in more relevant and reliable financial information.

Usually exceptional items can be reported in two ways according to IAS 1 in the Statement of Comprehensive Income if one statement method is used and if two statements method is used then such disclosures will be on the face of Income Statement:

  • As a regular line item i.e. as a standard income statement line item (in aggregate form) but to clarify the nature and amount a disclosure will be made in the notes
  • If the item is material then a separate disclosure will be made as an additional line item.

2 COMMENTS

  1. anyanwu christian anyanwu christian

    please,i need answers to the above questions

  2. How can we regulate the inflation

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