Extraordinary gains and losses almost never happen

Accountants say this wasn't extraordinary.

Extraordinary gains and losses are gains and losses that are considered both unusual and infrequent. Unusual, in the sense that you wouldn’t have reasonably expected this event to happen.  Infrequent in the sense that you don’t expect this event to happen again.  US Generally Accepted Accounting Principles (GAAP) are highly restrictive about extraordinary items; these apocryphal gains and losses almost never happen.

Remember when the City of New Orleans was wiped out by Category 3 Hurricane Katrina?  Not extraordinary, because hurricanes might be unusual, but they’re not infrequent.

September 11 terror attacks?  Also not extraordinary.

My favorite example is an elephant escaping from the zoo, travelling 100 miles, breaking into a light bulb factory, and then wrecking the inventory.  Now that’s extraordinary.  Think of something that will probably never happen, so much so that you wouldn’t even bother buying insurance for it, and if it happens anyway.  That might be extraordinary.

In fact, there are almost no extraordinary items to be found in companies’ financial statements, as I wrote in this article with my colleague Dr. Theresa Henry,  This is just a topic taught in accounting courses and covered by the CPA exam.  Among us accounting professors, it is a favorite obscure topic on which to ask multiple choice questions.

In case you’re curious, an extraordinary gain and loss, should one every happen, would be reported at the bottom of the income statement, separately from all other items.  These items are reported “net of taxes,” i.e. the net effect of the gain and losses, after subtracting the related income tax benefits or costs, is reported.

[Image: New Orleans in Hurricane Katrina courtesy of Wikipedia Commons.]

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