Special Items refer to those non-recurring financial transactions or events that can significantly influence an organization’s financial statements. These items are often depicted separately to provide a clearer view of the entity’s core operational results. Though “special items” are often used interchangeably with “unusual items,” sector-specific terminologies may lead to slight variations in their definitions.
Important Characteristics of Special Items
Non-Recurring Nature
Special items are distinguished by their non-recurring nature. These events or transactions are not part of the normal business operations and are unlikely to occur again in the foreseeable future.
Significant Impact
The financial implications of special items are typically substantial, affecting key financial metrics like net income, earnings per share (EPS), and operating margins.
Examples of Special Items
- Restructuring costs: Expenses incurred due to the reorganization of a company.
- Asset impairments: Significant write-downs of the value of long-term assets.
- Discontinued operations: Financial results from parts of a business that have been sold or closed.
- Legal settlements: One-time charges or credits resulting from litigation.
Accounting and Reporting of Special Items
Compliance with Standards
According to accounting standards such as the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), special items must be disclosed separately in financial statements. This practice aims to provide transparency and help stakeholders make more informed decisions.
Financial Statement Presentation
Special items are usually presented in the income statement as separate line items, either within operational income or as part of the final net income figure. Detailed notes in the financial statements often explain the nature and financial impact of these items.
Sector-Specific Definitions and Examples
Manufacturing Sector
In the manufacturing sector, special items might include significant write-offs of obsolete inventory or the closure of a significant production facility.
Financial Sector
For banks and financial institutions, special items could encompass considerable losses from bad loans, major legal fines, or gains/losses from the sale of a subsidiary.
Comparisons with Related Terms
Special Items vs. Unusual Items
While both terms can often be used interchangeably, “unusual items” is a broader term that may include both recurring and non-recurring events that are unusual in nature but not necessarily non-recurring.
Special Items vs. Extraordinary Items
According to the FASB, extraordinary items are defined as both unusual and infrequent, and their separate presentation was eliminated from GAAP accounting after 2015. Special items can be unusual, infrequent, or both but continue to be disclosed separately.
FAQs
Why Are Special Items Important in Financial Reporting?
How Can Investors Use Information on Special Items?
Are Special Items Always Negative?
References
- Financial Accounting Standards Board (FASB) resources
- International Financial Reporting Standards (IFRS) guidelines
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
Summary
Special Items are non-recurring financial events that have a significant impact on a company’s financial statements, offering valuable insights into the external and extraordinary influences on the firm’s performance. These items, although often confused with unusual or extraordinary items, have a unique place in financial reporting due to their significant and one-time nature, and their separate disclosure provides clarity and transparency to stakeholders.
