Extraordinary Items: The CFA Curriculum’s Case Study in a Concept That No Longer Exists

Every so often, the CFA curriculum asks you to learn something not because it’s current practice, but because understanding why it was abolished teaches you something the current rules alone can’t. Extraordinary items are the clearest example of this in the financial reporting section of the curriculum. You’ll spend real study time on a classification that neither US GAAP nor IFRS actually permits anymore — and that’s precisely the point. The history of extraordinary items, and the reasoning behind eliminating them, tells you almost everything you need to know about how standard-setters think about earnings quality, comparability, and the temptation companies face to explain away their bad quarters.

What “Extraordinary” Used to Mean

Under the old US GAAP framework, an item could only be classified as extraordinary if it met two conditions simultaneously: it had to be unusual in nature and infrequent in occurrence. Both conditions had to hold — not one or the other. Unusual in nature meant the event was abnormal and clearly unrelated to the entity’s typical, ordinary business activities, judged in light of the environment in which the entity operated. Infrequent in occurrence meant the event was not reasonably expected to recur in the foreseeable future, again judged against that same operating environment.

A classic textbook example was an uninsured loss from an earthquake affecting a company with no history of operating in seismically active regions. A loss like that was genuinely abnormal for that business and genuinely unlikely to happen again. When both tests were satisfied, the item was reported separately on the income statement, net of tax, below income from continuing operations, and specifically excluded from the calculation of operating and net income from ordinary activities. The logic was straightforward: if you’re trying to assess a company’s sustainable, ongoing earnings power, a one-off earthquake loss shouldn’t be blended into the same line item as revenue from selling widgets.

Why the Category Was Eliminated

Here’s where the story gets interesting, and where the CFA curriculum wants you to pay close attention. IFRS never permitted extraordinary item classification in the first place — the revised IAS 1, effective from the early 2000s, explicitly prohibited presenting any items of income or expense as “extraordinary,” whether on the face of the income statement or in the notes. The IASB’s reasoning was that the extraordinary classification was too subjective and too easily manipulated. Deciding whether something was truly “unusual” and truly “infrequent” involved enough management judgment that companies could shift genuinely operational losses into the extraordinary bucket to flatter their reported operating results.

US GAAP held onto the concept for years longer, but eventually arrived at the same conclusion. In 2015, the Financial Accounting Standards Board issued an update that eliminated the extraordinary items concept from US GAAP entirely. The board’s stated rationale echoed the IASB’s original concerns: the cost and complexity of assessing whether an item met the unusual-and-infrequent threshold outweighed the benefit to financial statement users, and in practice, very few items had ever actually qualified — the bar was so high that the classification had become more trouble to apply consistently than it was worth. What had originally been designed as a tool for clarity had, over time, become a source of inconsistency between companies and even between periods for the same company.

This is the part worth sitting with. A standard-setting concept can be well-intentioned and still get retired, not because the underlying problem it addressed disappeared, but because the mechanism chosen to address it proved unreliable in practice. The need to separate one-off events from recurring operations didn’t go away in 2015 — only the specific labeled category for doing so did.

What Replaced It: Unusual or Infrequent, But Not Both Required

Eliminating “extraordinary” as a category didn’t eliminate the underlying reporting need. Companies still experience genuinely unusual events — restructuring charges, litigation settlements, asset impairments, gains or losses on debt extinguishment — that analysts reasonably want to see separated from core operating performance. Current US GAAP and IFRS both still require separate disclosure of items that are unusual in nature or infrequent in occurrence, but critically, an item no longer needs to satisfy both conditions to warrant separate presentation, and it’s never reported net of tax as a distinct line below continuing operations the way extraordinary items once were. Instead, these items are disclosed separately within income from continuing operations — either on the face of the income statement or in the notes — and remain part of pre-tax income, taxed at the ordinary rate alongside everything else.

This is a meaningful shift in framing. The old extraordinary items regime treated qualifying events as fundamentally separate from the business — almost as if they belonged to a different income statement entirely. The current approach treats unusual or infrequent items as still part of operations, just flagged for the reader’s attention. The message embedded in that design choice is that very few things a company experiences are truly disconnected from the business it’s in; even a natural disaster affects a real company with real ongoing operations, and burying that loss below a bright line invited exactly the kind of earnings management standard-setters were trying to prevent.

Discontinued Operations: A Related but Distinct Concept

Candidates frequently confuse extraordinary items with discontinued operations, and the CFA curriculum tests that distinction deliberately. Discontinued operations refer to a component of an entity — a business segment, a subsidiary, a major product line — that has either been disposed of or is classified as held for sale, and represents a strategic shift with a major effect on the entity’s operations and financial results. Unlike extraordinary items, discontinued operations remain a live and required reporting category under both US GAAP and IFRS today; they were never eliminated.

When a company discontinues an operation, the results of that operation — including any gain or loss on disposal — are reported separately, net of tax, below income from continuing operations. The rest of the income statement reflects only what remains: the ongoing business going forward. This separation exists for a very practical analytical reason. If a company sells off an unprofitable division, an analyst forecasting future earnings needs to model the business that will actually continue to exist, not a blended historical average that includes a segment that no longer belongs to the company at all.

Changes in Accounting Principle and Estimates: One More Distinction Worth Holding Onto

Rounding out this cluster of concepts, the curriculum also expects candidates to distinguish extraordinary and unusual items from changes in accounting principle and changes in accounting estimate, because all of these can create discontinuities in reported earnings that a careless reader might misinterpret as operating performance.

A change in accounting principle — switching from one acceptable method to another, such as moving from FIFO to weighted-average inventory costing — is generally applied retrospectively, meaning prior period financial statements are restated as if the new method had always been used. A change in accounting estimate — revising the useful life of an asset, or updating an allowance for doubtful accounts based on new information — is applied prospectively, affecting only current and future periods, with no restatement of prior statements. Neither of these is a one-off “item” the way an unusual loss is; they’re changes in the measurement framework itself, and mishandling the distinction between retrospective and prospective treatment is a common and costly mistake in both exam questions and real financial statement analysis.

Why This Still Matters for Analysis, Even Though the Category Is Gone

It would be easy to treat extraordinary items as a piece of financial reporting trivia — a rule that used to exist and no longer does. But the analytical instinct behind the rule is exactly what a good equity or credit analyst still needs to exercise every time they open a set of financial statements. Reported net income is not the same thing as sustainable earning power, and the gap between the two is often hiding in exactly the kind of items this whole area of the curriculum is about: restructuring charges that recur suspiciously often, impairments that coincide neatly with management changes, litigation settlements that show up every other year. The label “extraordinary” is gone, but the analyst’s job of separating the durable from the transient never was.

Final Thoughts

The extraordinary items topic is a useful reminder that accounting standards are not fixed truths handed down once and for all — they’re working solutions to a persistent problem, revised when the mechanism stops working even if the underlying need doesn’t go away. Learning that IFRS never allowed the classification, that US GAAP abolished it in 2015, and that discontinued operations and unusual-or-infrequent items survived in modified form, gives you more than exam-ready trivia. It gives you a clearer picture of what standard-setters are actually trying to protect: the reader’s ability to tell the difference between a business’s real, repeatable earnings and everything else that happened to show up on the income statement in a given year.