What it is:
How it works (Example):
An exceptional item should not be confused with an extraordinary item. An extraordinary item is also an unusual charge but does not accrue during the ordinary course of business and does not need to be reported.
An exceptional item may be either an outgoing charge or an incoming surplus of significant size.
Let's assume Company ABC is experiencing poor business. It may choose to undergo restructuring which costs a significant amount of money and is unusual during the normal cycle of business. The large transaction costs would be reported as an "exceptional item" on the balance sheet because it was significant and unusual. If the reorganization continues for the next several years, the transaction costs continue to be listed as "exceptional items" for the subsequent years until the reorganization is complete.
Why it Matters:
Exceptional items are important because they are a way to separate normal business operation transactions from unusual ones. Though they are generally not disclosed on a company's income statement, exceptional items are usually disclosed on the balance sheet and extraordinary items are usually disclosed in the notes to financial statements.
Exceptional items can be easily manipulated by a company trying to "window dress" its performance. Investors may consider researching the reasoning behind exceptional items on a given company's balance sheet before investing further in that company.