An extraordinary loss refers to an unexpected, one-time loss that a company incurs from events outside its typical business operations. This concept was used in financial accounting under the U.S. Generally Accepted Accounting Principles (GAAP) prior to 2015.
Events that might have led to an extraordinary loss could include natural disasters, expropriations, prohibitions under new regulations or laws, and foreign currency changes for companies operating in a highly inflationary economy.
Extraordinary losses, like extraordinary gains, were thought to be 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, 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 Loss
Let’s consider an example under the pre-2015 U.S. GAAP rules:
Suppose “TropicResorts Inc.” is a company that owns and operates a luxury resort on a tropical island. In 2014, an unusually powerful hurricane hits the island, causing significant damage to the resort and resulting in a loss of $10 million, even after the insurance coverage.
Assuming that such a powerful hurricane is both unusual and infrequent in the area where TropicResorts Inc. operates, this loss of $10 million would be considered an “extraordinary loss.” Under the pre-2015 U.S. GAAP rules, TropicResorts Inc. would have reported this loss separately on its income statement, net of taxes. This way, investors and other stakeholders could understand that this loss was a one-time event, not related to the company’s regular operations, and is not expected to recur regularly.
However, as per the post-2015 accounting standards, this loss would be included in income from continuing operations, without any extraordinary item classification, as the FASB has eliminated this concept from U.S. GAAP.