# Extraordinary Items (AS 5)

## Definition

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.

## Two-fold test

For an item to be classified as extraordinary, BOTH must apply:

1. The event/transaction is clearly distinct from ordinary activities, AND

2. It is not expected to recur frequently or regularly.

## Items that ARE extraordinary

Profit on sale of unused land (where company is not in real-estate business) sold to tide over liquidity problems
Loss of unused factory shed destroyed by fire
Government grant becoming refundable
Government grant receivable as compensation for expenses incurred in a previous accounting period (per Q13 classification given)
Attachment of property of the enterprise (e.g., by tax/legal authorities)

## Items that are NOT extraordinary

GST/tax demand on services rendered as part of ordinary business activity – ordinary, not extraordinary
Change in carrying value of asset due to change in depreciation method – this is a change in estimate, treated as normal expense
Additional wages liability due to retrospective wage revisions – arises from ordinary activities
Inventory write-down to NRV – ordinary, but requires separate disclosure

## Disclosure

The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived.

CRITICAL: Extraordinary items must NOT be netted off against each other (e.g., a profit on sale of land cannot be set off against a fire loss; both must be shown separately).

## Distinction: Extraordinary vs. Ordinary-but-Disclosable

Some items arise from ordinary activities but are of such size, nature or incidence that their disclosure is relevant to explain enterprise performance. These are NOT extraordinary, but their nature and amount should still be separately disclosed. Examples:

Write-down of inventories to NRV (and reversal thereof)
Material retrospective wage revisions
Disposal of items of PPE/long-term investments
Litigation settlements

Worked example

### Example 1

Q6: Change in depreciation method – is deficiency 'extraordinary'?

A Ltd. changed from SLM to WDV; recomputed retrospectively; debited deficiency as 'extraordinary expense'.

Answer: No. A change in depreciation method is not distinct from ordinary activities. It is treated as a change in accounting estimate. The deficiency should be charged as a normal expense in the current P&L, not extraordinary.

### Example 2

Q7: GST demand on consultancy services

Z Ltd. (consultancy business) received GST demand of Rs. 5,00,000 and treated it as extraordinary.

Answer: No. Consultancy is Z Ltd.'s ordinary activity; GST on those services is part of ordinary activity. Treating the GST payment as extraordinary is contrary to AS 5.

### Example 3

Q12: Sale of unused land and fire in unused factory shed

Bela Ltd. earned Rs. 10 lakhs profit on sale of unused land; suffered Rs. 8 lakhs fire loss on unused factory shed; disclosed only net Rs. 2 lakhs as 'profit from sale of assets'.

Answer: Both events are distinct from ordinary activities, material, and not expected to recur — hence both are extraordinary items. Netting them off is incorrect. The profit of Rs. 10 lakhs and loss of Rs. 8 lakhs must be separately disclosed in the P&L.

### Example 4

Q14: True/False – extraordinary items not disclosed as part of P&L

Answer: FALSE. Extraordinary items ARE disclosed in the statement of profit and loss as part of net profit/loss for the period; the nature and amount must be separately disclosed to enable readers to perceive impact on current P&L.

### Example 5

Q16: Retrospective wage hike of Rs. 30 lakhs

Finance manager wanted to disclose Rs. 30 lakhs additional wages as 'extra-ordinary item'.

Answer: Incorrect. Wages arise from ordinary activities. Treat as ordinary current-year expense, but disclose separately due to size/nature.

⚠️ Common exam mistakes

Classifying tax/GST demands as extraordinary – any tax on ordinary business operations is itself ordinary.
Netting off profit on extraordinary gains against extraordinary losses – AS 5 requires SEPARATE disclosure of each.
Treating large amounts as automatically extraordinary – size alone does NOT make an item extraordinary; the event must be distinct from ordinary activities.
Confusing 'extraordinary' with 'prior period' – extraordinary refers to nature (distinct from ordinary), prior period refers to origin (error/omission of an earlier year).
Treating retrospective wage revisions or legislative changes as extraordinary – they arise from ordinary employer-employee relationships.
Treating change in depreciation method as extraordinary – it is a change in accounting estimate.

Bare-Act text Extraordinary Items (Paras 4 & 8-11) · AS 5 · click to expand

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. Extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived.

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AS 5 - Extraordinary Items

Worked example

⚠️ Common exam mistakes