Extraordinary Gain
An extraordinary gain refers to an unexpected, one-time profit that a company receives from an event that is not part of its typical business operations. This term was used under U.S. Generally Accepted Accounting Principles (GAAP) prior to 2015.
Events that could lead to an extraordinary gain included natural disasters, expropriations, prohibitions under new regulations or laws, and foreign currency changes for companies operating in a highly inflationary economy.
The concept was that these gains (and the corresponding concept of extraordinary losses) were so unusual and infrequent that they were separated out on the income statement so as not to confuse the readers about the company’s ordinary earnings. They were listed separately, below income from continuing operations, and were shown net of taxes.
However, it’s important to note that as of 2015, the Financial Accounting Standards Board (FASB), which sets the standards for U.S. GAAP, eliminated the concept of extraordinary items. The rationale for this change was that it was difficult to consistently determine what constituted an “extraordinary” item, and the concept was not used in other major accounting frameworks, like International Financial Reporting Standards (IFRS), causing inconsistencies in financial reporting. Now, all events and transactions are included in income from continuing operations, even if they are unusual or infrequent.
Example of an Extraordinary Gain
Let’s consider a hypothetical example of an extraordinary gain under the pre-2015 U.S. GAAP rules:
Suppose a company, “LandRich Inc.,” owns a large amount of rural land as part of its assets, which it purchased years ago for $1 million. A sudden discovery of valuable minerals under this land makes the property highly sought after by mining companies.
One of these mining companies offers LandRich Inc. $10 million to buy the land due to the newfound value. LandRich Inc. decides to sell the land, and therefore makes a gain of $9 million ($10 million selling price minus $1 million original cost) from this sale.
Assuming that LandRich Inc. is not in the business of buying and selling land, and such mineral discoveries are both unusual and infrequent in their circumstance, this gain of $9 million would have been considered an “extraordinary gain” under the pre-2015 U.S. GAAP rules. It would have been reported separately on the income statement, net of taxes, so as not to distort the company’s regular earnings from its normal operations.
However, as per the current accounting standards, this gain would be included under income from continuing operations, as the “extraordinary” classification has been eliminated.