What is an Exceptional Item?

An exceptional item is an unusually large and uncommon transaction charge that must be disclosed on the balance sheet in accordance with GAAP.

Exceptional Item Example

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.

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.

Why Exceptional Items Matter

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.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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