In financial accounting, the presentation of "extraordinary items," "discontinued operations," and "natural disaster losses" on the income statement has evolved, particularly under U.S. Generally Accepted Accounting Principles (GAAP).
Extraordinary Items
The concept of "extraordinary items" has been eliminated from U.S. GAAP as of 2015, with International Financial Reporting Standards (IFRS) never having adopted the concept. Previously, an extraordinary item was defined as an event or transaction that was both unusual in nature and infrequent in occurrence. These items were reported separately on the income statement, net of tax, below "income from continuing operations." The intent was to provide clarity by separating items unrelated to a company's ordinary operations. However, due to confusion and inconsistencies, the Financial Accounting Standards Board (FASB) eliminated this classification. Now, gains and losses that would have been considered extraordinary are reported as part of income from continuing operations, though they may still be disclosed separately if material.
Discontinued Operations
Discontinued operations refer to components of a company, such as a division or product line, that have been divested or shut down. These are reported separately on the income statement to help investors distinguish between profits from ongoing activities and those from operations that have ceased.
Under U.S. GAAP, for an operation to be classified as discontinued, two primary conditions must be met:
- The transaction must result in the elimination of the operations and cash flows of the divested business from the company's operations.
- The discontinued business must have no significant ongoing involvement with its operations.
On the income statement, discontinued operations are presented as a single line item, net of tax, at the bottom of the statement, following "income from continuing operations." This line item typically includes both the income or loss from the segment's operations for the portion of the current year before it was discontinued and any gain or loss on the disposal of the segment.
Natural Disaster Losses
Prior to the 2015 change, some natural disaster losses might have been classified as extraordinary items if they met the criteria of being both unusual and infrequent. However, with the elimination of the extraordinary items concept, losses from natural disasters are generally reported as part of income from continuing operations.
U.S. GAAP requires that losses incurred from natural disasters and any related insurance recoveries be accounted for separately. Costs associated with the disaster, such as property damage and cleanup, should be recorded in the fiscal year the disaster occurred. Insurance proceeds are recognized as a receivable when their receipt is probable and are generally recorded as separate gains in the income statement to offset the initial loss.
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