Extraordinary Gains and Losses - dummies

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

Extraordinary gains and losses are non-recurring gains and losses that aren’t part of normal business operations. Here are some examples of extraordinary gains and losses:

  • A business may shut down and abandon one of its manufacturing plants and record a loss. The loss may be due to asset write-downs and severance compensation for laid-off employees.

  • A company may suffer a large loss from a flood. The loss is over and above the compensation from a flood insurance policy. Many events considered “acts of God” (an insurance term) are labeled as extraordinary losses from an accounting perspective.

  • A business may lose a major lawsuit and have to pay millions in damages.

As a manager, you need to consider both your income from operations — and any extraordinary financial events. By definition, extraordinary financial events are infrequent. In many cases, the manager couldn’t possibly foresee or control the extraordinary event. Here are some important points for a manager to consider:

  • The first priority is to make changes to the business to generate income from operations each year. Many of those decisions are within the manager’s control, such as marketing (to increase sales) and working with vendors (to manage costs).

  • Take whatever steps you can to limit extraordinary losses. For example, work with your insurance company to get reasonable levels of insurance on company assets. Insurance coverage helps offset losses due to unforeseeable events, such as tornados, hurricanes, floods, and fires.

  • Realize that extraordinary gains won’t reoccur. Don’t expect this type of unusual gain to offset lower earnings from operations in future years. In other words, extraordinary gains aren’t a source of reliable income. Investors and creditors expect a manager to generate earnings from operations.

  • If unable to reliably generate earnings from its operations, the company may not be viable (solvent) over the long term. Investors and creditors may raise this issue as a concern.