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There are differences between how the U.S. Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) treat unusual or infrequent income or expense items, also known as nonrecurring. Irregular items are occurrences unrelated to a business’s operational and financial results.
Key Takeaways
- Companies identify unusual or infrequent items on a financial statement to separate income or expenses unrelated to the core business.
- Irregular items can include damage from natural disasters and restructuring costs.
- GAAP rules report infrequent transactions on the income statement or disclose them in the financial statement footnotes.
- IFRS rules report unusual transactions as revenues, finance costs, post-tax gains or losses, or results from associates and joint ventures.
Types of Unusual or Infrequent Items
Some items on income statements are reported separately from income because they are considered irregular and nonrecurring. Special considerations are given to so-called unusual or infrequent items to clarify rare circumstances to investors or regulators about a firm’s current or future financial performance. Examples of unusual items include:
- Gains or losses from a lawsuit
- Losses or slowdown of operations due to natural disasters
- Restructuring costs
- Gains or losses from the sale of assets
- Costs associated with acquiring another business
- Losses from the early retirement of debt
- Plant shutdown costs
U.S. GAAP
GAAP rules require companies to disclose infrequent and unusual events. Under Generally Accepted Accounting Principles, a nonrecurring item can only be classified as unusual or infrequent, but not as both.
The Financial Accounting Standards Board (FASB) mandates that companies report unusual or infrequent transactions on the income statement or disclosed in their financial statement footnotes.
Important
Under GAAP, unusual events were once considered extraordinary items separated from operating earnings. As of 2015, infrequent items are disclosed separately in the income statement to define their impact on the company’s financial picture.
IFRS
The IFRS does not hold distinctions for items of an operational nature that occur irregularly or infrequently. All results are disclosed as revenues, finance costs, post-tax gains or losses, or results from associates and joint ventures.
The IFRS has a separate disclosure requirement for income or expenses of abnormal size or nature. These disclosures can be on the face of the income statement or in the notes section of the report.
Fast Fact
The IFRS maintains the global accounting standards of 168 jurisdictions including the U.S. and countries in the European Union.
What Was the Designation “Extraordinary Items” Eliminated?
Many items reported as irregular or unusual used to be classified as extraordinary items, however, GAAP no longer requires this classification to reduce the cost and complexity of financial statements. Extraordinary items were explained in the notes to the financial statements separately from operating earnings.
Why Do Companies Report Unusual Items?
It is important to report unusual or infrequent items separately to help ensure the transparency of financial reporting as they are not considered part of normal business operations.
How Does the Treatment of Infrequent Items Affect Investors?
Reporting unusual or infrequent items provides clarity to investors and analysts that these income and expenses are not part of the core operations and therefore not likely to occur again. This helps investors and analysts make better judgments on the future performance of a business.
The Bottom Line
The two accounting standards, GAAP and IFRS, approach reporting unusual or infrequent items in slightly different fashions, however, both no longer use the classification of extraordinary items for simplicity. Both standards require the items to be included in either the income statement or the notes to the financial statements.
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