Q.1 what are the special item and extraordinary items? Name and briefly explain? Ans.

Meaning of Extraordinary items: Gains or losses included in a company's financial statements, which are infrequent and unusual in nature. These are usually explained further in the "notes to the financial statements." NON-RECURRING ITEMS Unusual or Infrequent Items Included in this category are items that are either unusual or infrequent in nature but cannot be both. Examples of unusual or infrequent items: Gains (or losses) as a result of the disposition of a company's business segment including: Plant shutdown costs Lease-breaking fees Employee-separation costs Gains (or losses) as a result of the disposition of a company's assets or investments (including investments in subsidiary segments) including: Plant shut-down costs Lease-breaking fees Gains (or losses) as a result of a lawsuit Losses of operations due to an earthquake Impairments, write-offs, write-downs and restructuring costs Integration expenses related to the acquisition of a business Extraordinary Items Events that are both unusual and infrequent in nature are qualified as extraordinary expenses.

Example of extraordinary items: Losses from expropriation of assets Gain (or losses) from early retirement of debt

These are the result of unforeseen and atypical events. They are usually accounted for separately so they don't skew the company's regular earnings. An example would be a snowstorm in Hawaii creating extraordinary losses to banana crops. These losses might be written down as a one-time charge due to an extraordinary item.

In financial accounting, an extraordinary item is a non-recurring event that materially affects the financial results of the entity for the reporting period. GAAP requires that any extraordinary item be explained in the notes to the financial statements. An extraordinary item can have either a favorable or unfavorable impact upon financial performance. Examples of an extraordinary item for a major company include an acquisition, a restructuring, and the settlement of a lawsuit. An extraordinary item may also reflect the provision of funds for the estimated impact of an anticipated nonrecurring event. Comparison of a company's most recent performance with past results must take into account the effect of each extraordinary item. The business media sometime report not only a company's earnings, but also the earnings after excluding the impact of a newsworthy extraordinary item. Example: Non-Recurring and Extraordinary Items or Events you own a successful dry cleaning business. Out of the blue, a tornado sweeps away your storefront and shuts you down for a few months. Your insurance will pay to rebuild but it will take time and there are other costs involved. Is the tornado expense a regular, expected occurrence? Does it really hurt the value of your business? Of course not. In the unpredictable world of business, events will arise that are not expected and most likely not occur again. These one-time events are separated on the income statement and classified as either non-recurring or extraordinary. There is a difference between the two, which I'll explain in a moment. These two categories allow investors to more accurately predict future earnings. If, for instance, you were considering purchasing a gas station, you would base your valuation on the earning power of the business, ignoring one-time costs such as replacing the station's windows after a thunderstorm. Likewise, if the owner of the station had sold a vintage Coke machine for $17,000 the year before, you would not include it in your valuation because you had no reason to expect that profit would be realized again in the future. The Difference between Non-Recurring and Extraordinary Events on the Income Statement what is the difference between non-recurring and extraordinary events?

Non-Recurring Event: A non-recurring event is a one-time charge that the company doesn't expect to encounter again. An extraordinary item is an event that materially* affected a company's finance and needs to be thoroughly explained in the annual report or SEC filings. Extraordinary Event: Extraordinary events can include costs associated with a merger, or the expense of implementing a new production system (as McDonald's did in the late 1990's with the Made for you food preparation system).

How It Works/Example: Let's assume that Company XYZ, an American company, operates a chain of beach resorts in the Florida Keys, and the resorts are hit by a blizzard. Company XYZ would show the expenses related to the blizzard in a separate line item on the income statement (under the header "Extraordinary Expenses"). In order for expenses to count as extraordinary, the occurrence must be truly abnormal and not reasonably expected to recur in the foreseeable future as is the case with a blizzard in Florida. Other examples of extraordinary expenses might include the seizure of assets by a foreign government (if, say, Company XYZ also operated resorts in France, and the French government suddenly seized the assets there) or dramatically adverse legislation (such as the outlawing of beach resorts by the American or French government). Often the company's financial statements will contain footnotes offering additional insight and detail on these expenses. Usually, determining whether an item is extraordinary is black and white. However, there is some degree of judgment required in the interpretation of "infrequent, unusual, and material in size." In our example, had the blizzard been a hurricane, the related expenses probably would not have qualified as extraordinary items, because hurricanes are very likely to hit Florida during certain times of the year. Why It Matters: The notion behind the extraordinary items accounting treatment is to prevent "once-in-alifetime" events from skewing a company's regular earnings. Most analysts and investors add extraordinary items back to the company's reported net income to get a sense of what the company's "real" profitability was. It is important to note, however, that not all investors exclude extraordinary items from their calculations, and this can result in misleading P/E ratios or other measures. Thus, extraordinary items give companies some leeway, allowing them to sometimes report lower earnings but get credit for higher earnings. Obviously, it is tempting for companies to try to report every bad thing that happens as an extraordinary item. This is why the Accounting Principles Board largely governs the accounting treatment and qualifications of extraordinary items. "The gains and losses resulting from natural disasters that occur infrequently, such as floods, earthquakes, and fires, are extraordinary items. Gains or losses from condemning land or buildings for public use are also extraordinary. Delta Air Lines once reported an extraordinary gain of over $5.5 million as the result of the crash of one of its 727's. The plane that crashed was insured for $6.5 million, but its book value in Delta's accounting records was $962,000." Source(s): 'Corporate Financial Accounting' 9E 2007 - Warren & Reeve