What are exceptional and extra ordinary items? The question is not new and therefore, it is not for the first time that accountants/auditors have to answer the same.
However, the question assumes significance from Schedule VI of Companies Act, 1956; Schedule III of Companies Act, 2013, and clause 41  of listing agreement where it requires company to submit to the stock exchange the reason or explanation for variation in exceptional and extraordinary item if it is excess of 10% or Rs. 10 Lakhs, whichever is higher and all items of income and expenditure arising out of transactions of exceptional nature shall be disclosed and all the extraordinary items, if any, shall be disclosed in accordance with Accounting Standard 5 .
Background of Extraordinary Items:
One of the early accounting statements that would show the purpose/ genesis of introducing extraordinary items is here:
Discussion of extraordinary items (EI) is not new. The first document mentioning the term, “Uniform Accounting,” was issued in 1917 by the Federal Reserve Bank, but prepared by an AICPA committee. This pamphlet was reissued the following year as “Approved Methods for the Preparation of Balance Sheet Accounts.” These statements recommended an income statement that showed extraordinary gains and losses on its face after determination of net income for the period. In the 1920s, however, extraordinary items were typically accounted for directly in the retained earnings (or surplus) account. Often there was little, if any, disclosure of what constituted an extraordinary item, and accountants tended to view these in a “rather liberal” manner (Weldon Powell, “Extraordinary Items,” Journal of Accountancy, January 1966). The income statement simply indicated to users that income or loss for the period had been determined excluding extraordinary items.
When the AICPA published ARB 43, Restatement and Revision of Accounting Research Bulletins Nos. 1–42, in 1953, the following items, when material, were specified as allowed to be excluded from net income if the inclusion would cause users to draw misleading conclusions from an analysis of net income:
Meaning of exceptional items:
A good definition of “exceptional items” can be: “Exceptional items are defined as those items that in management’s judgment are material items which derive from events or transactions that fall within the ordinary activities of the Group and which individually or, if of a similar type, in aggregate, need to be disclosed by virtue of their size or incidence.”
Para 14 of AS 5 gives certain examples of such exceptional items:
From the above, the following features of exceptional items can be deduced:
Illustrations of exceptional items:
Meaning of Extra Ordinary items:
AS 5 “Net Profit or Loss for the period, Prior period items and changes in Accounting Policies” at para 4.2 defines ‘extraordinary items’ as: ‘Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly.
From the above, the following features of extraordinary items can be deduced:
Illustrations of Extraordinary items:
Why separate disclosures:
One of the important objectives of disclosure of financial performance is to be of predictive value. Exceptional items not being repetitive in nature do not have a predictive value. Extra ordinary items are anyway not a part of the operations of the company, and therefore, cannot, by very nature be expected to recur. Hence, the objective of a separate disclosure is to let the reader take a view on expected future performance of the company.
 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
[The above post is contributed by Neelu Singh at Vinod Kothari & Co. He can be contacted at firstname.lastname@example.org ]