Unusual Item

An unusual item is a nonrecurring or one-time gain or loss or expense that is not considered part of normal business operations. Unusual expenses are recorded under operating expenses and then identified by management as unusual in its discussion of financial results or supplemental material for investors. Unusual gains or losses on the income statement may be self-explanatory or would be discussed by the company in a similar manner described above.

Reporting unusual items separately is important to ensure the transparency of financial reporting. Unusual items are unlikely to recur, so separating these items — either explicitly on an income statement or in the management discussion and analysis (MD&A) section — allows investors to better assess the continuing income-generating capacity of the business. Management would flag certain one-time or extraordinary items, but whether an analyst or investor believes they will not recur is a different matter.

Unusual items may include:

• restructuring charges inclusive of severance pay and factory closings
• asset impairment charges or write-offs
• losses from discontinued operations
• losses from early retirement of debt
• M&A or divestiture-related expenses
• gains or losses from sale of assets
• abnormal legal costs
• natural disaster damage costs
• charges stemming from changes in accounting policy

The treatment of unusual items has several implications related to the analysis of company performance and valuation of its shares, credit agreements and executive compensation schemes. An analyst would have to make adjustments to the income statement to produce a "clean" EBIT, EBITDA and net income figures on which to calculate price multiples. Debt agreements would have to specify the exclusions to how certain covenants are calculated. Executive pay plans, too, would need to explain how unusual items are handled in compensation formulas.