Extraordinary Gain (Extraordinary Loss)
In the income statement of the company, some events arise as extraordinary and non-recurring that are necessary to report. The reason for this is that the gain or losses are realized on these items and it is necessary to disclose them properly in the financial statements.
Reporting of extraordinary events in financial statements
The events classified as extraordinary events and reported separately in the financial statements are of two types. Both of these events are disclosed in the income statements separately to account them properly. These rare events are:
- Discontinued operations
- Extraordinary gains or losses
Since these events are non-recurring in nature, it is rare for these events to occur simultaneously in a reporting period.
Extraordinary gains are the gains that are unusual in nature, and these gains are not realized in the normal course of action. Apart from being unusual, these gains do not occur frequently and only occur when a special sort of transaction is carried out. Special circumstances need to exist for realization of the extraordinary gains.
Example of extraordinary gains
Sale of a subsidiary is the best example to quote the case of extraordinary gains. If the subsidiary is sold at, a price that is more than its market value than the gain arises on this transaction is abnormal gain, and this will be reported separately.
Similar to the extraordinary gains, extraordinary losses are unusual in nature and are not incurred in the normal course of action.
Example of extraordinary losses
If due to an earthquake, the business premises of company have destroyed and the manufacturing unit has incurred damage, this will be a non-recurring and unusual event. Since this causes the impairment, the discontinuation of the business activities will invoke losses, which will be categorized as rare losses.
Reporting of the extraordinary gains or losses
Extraordinary gains or losses are reported separately under the single-step or multiple-step income statement as mentioned above. These events are recorded net of income tax in case of gains.The separate reporting of extraordinary gains and losses is necessary for the companies (especially public companies) because this segregation provides a true and fair view of the profits that the company has realized, and it is prudent to record the rare items this way. This will also prevent the material misstatement of monetary statements.