Advanced Accounting · AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Extraordinary Items and Items of Exceptional Nature (AS 5)

Updated 4 October 2026 · Fact-checked

Under AS 5, an extraordinary item is income or expense from an event clearly distinct from ordinary activities and not expected to recur frequently or regularly. Exceptional items are ordinary-activity items whose size, nature or incidence needs separate disclosure. To solve questions, test the event against ordinary activities, then disclose each item separately with nature and amount.

Understand Extraordinary Items and Items of Exceptional Nature

Every enterprise earns and spends money through its ordinary activities. These are the business activities it carries on, plus activities that support them, are incidental to them or arise from them. Sales, wages, rent, interest on business loans and bad debts are all ordinary.

An extraordinary item is income or expense that comes from an event or transaction clearly distinct from these ordinary activities, and which is not expected to recur frequently or regularly. Both tests must be met. AS 5 gives examples such as an earthquake or the attachment of an enterprise's property. The test is about the event, not the amount. A huge loss from a routine activity is still ordinary.

An exceptional item is different. It sits inside the profit or loss from ordinary activities. It is not unusual in type. It is unusual in size, nature or incidence, so the reader needs a separate note to understand the year's performance. AS 5 (para 12) does not define "exceptional items" as a category. It lists circumstances where items of income and expense within ordinary activities are disclosed separately, and these are commonly called exceptional items. The circumstances are: write-down of inventories to net realisable value and its reversal, restructuring of the enterprise's activities and reversal of related provisions, disposal of items of fixed assets, disposal of long-term investments, legal settlements, and other reversals of provisions.

So the key point is this. Extraordinary items are outside ordinary activities. Exceptional items are within ordinary activities. Do not mix them up, and never call an exceptional item extraordinary.

The same event can be classified differently by different enterprises. Judge it from the point of view of the enterprise in the question. Disclosure is the main exam point: each item is shown separately, with its nature and amount, so that its effect on current profit or loss can be seen.

Key rules to remember

Extraordinary item (definition): Extraordinary item = income or expense from an event clearly distinct from ordinary activities AND not expected to recur frequently or regularly; Both conditions must hold. If either fails, the item is not extraordinary.
Exceptional item (rule): Ordinary-activity item of such size, nature or incidence that separate disclosure is needed to explain the period's performance; It stays part of ordinary activities. Disclose nature and amount separately. AS 5 (para 12) lists the circumstances; the label "exceptional" is the common name.
Disclosure of extraordinary items: Show in the statement of profit and loss as part of net profit or loss for the period, with nature and amount of each item stated separately; The separate disclosure must let a reader see the effect on current profit or loss.
Profit flow (Schedule III, Division I, for companies following AS): Profit before exceptional and extraordinary items and tax + Exceptional items (income) − Exceptional items (expense) = Profit before extraordinary items and tax; then ± Extraordinary items = Profit before tax; This is the line order in the Schedule III Division I Statement of Profit and Loss format used by companies following AS. It is not a fixed requirement for every entity, so follow the format the question states.

How to solve Extraordinary Items and Items of Exceptional Nature questions

Use this method for any classification or presentation question on extraordinary and exceptional items.

1List each item in the question with its amount and the nature of the event behind it.
2Ask: is the event part of the enterprise's ordinary activities, or incidental to or arising from them? Decide this for the enterprise in the question.
3If the event is clearly distinct from ordinary activities AND not expected to recur frequently or regularly, classify it as extraordinary.
4If it is an ordinary-activity item but unusual in size, nature or incidence, classify it as exceptional. Check that the amount is large enough to matter to the reader.
5If it is routine and not unusual, treat it as an ordinary item with no separate disclosure.
6Present the profit and loss in the Schedule III Division I order used by companies following AS: profit before exceptional and extraordinary items, then exceptional items, then extraordinary items, each shown separately.
7State the nature and amount of each exceptional and extraordinary item in the disclosure, and write one line of reasoning for each classification.

Quickest way: Two-question test

When to use it: Use this for MCQs and for the classification part of written answers when time is short.

Question 1: Is the event outside normal business and unlikely to recur often? If yes to both, it is extraordinary. Look for words such as earthquake, attachment of property, or expropriation.
Question 2: If no, is it a routine type of item that is large or unusual enough to need a separate note? Think inventory write-down, disposal of fixed assets or investments, restructuring, legal settlement. If yes, it is exceptional.
Otherwise it is an ordinary item.
MCQ elimination: reject any option that calls an exceptional item extraordinary, or that says extraordinary items need no separate disclosure.
Written format: give the definition in one line, apply it to each item in a short table-like list, then give the disclosure treatment. This earns step marks even if your classification of one item differs.

Common mistakes in Extraordinary Items and Items of Exceptional Nature

Treating any large loss as extraordinary.
Students judge by amount instead of by the nature of the event.
Fix: Apply both tests: clearly distinct from ordinary activities and not expected to recur frequently or regularly. A large but routine item is at most exceptional.
Using the terms extraordinary and exceptional as if they mean the same thing.
Both sound like 'unusual' and both need separate disclosure.
Fix: Remember the location: extraordinary is outside ordinary activities, exceptional is inside them.
Classifying an event the same way for every business.
Students memorise examples as fixed lists.
Fix: Decide from the enterprise's own ordinary activities. Read what business it carries on before you classify.
Netting extraordinary items into other expenses without separate disclosure.
Students focus on the profit figure and forget the disclosure rule.
Fix: Always show the nature and amount of each extraordinary and exceptional item separately, so the effect on current profit or loss is visible.
Placing exceptional or extraordinary items in the wrong position in the profit flow.
The order of lines in the Schedule III Division I format is not practised.
Fix: For a company following AS, write the order: profit before exceptional and extraordinary items and tax, exceptional items, profit before extraordinary items and tax, extraordinary items, profit before tax.
Calling a normal write-off or routine bad debt exceptional.
Students assume every write-down is exceptional.
Fix: Treat it as exceptional only if its size, nature or incidence makes separate disclosure necessary. Otherwise it is an ordinary expense.

Worked examples

Example 1

A garment manufacturing company reports these items for the year: (a) uninsured loss of ₹4,00,000 when an earthquake destroyed part of its factory; (b) profit of ₹6,00,000 on sale of a long-term investment, which is material to the year's result; (c) bad debts of ₹80,000, in line with earlier years. Classify each item as per AS 5 and state the disclosure.

Show the solution

Item (a): An earthquake is an event clearly distinct from garment manufacturing and is not expected to recur frequently or regularly. Both tests are met, so the loss is extraordinary.
Item (b): Selling an investment is an activity linked to the enterprise's ordinary activities, so it is not extraordinary. Its size makes separate disclosure necessary to explain performance, so it is an exceptional item.
Item (c): Bad debts are routine and in line with earlier years. It is an ordinary expense, so no separate disclosure is needed.
Disclosure: show the ₹4,00,000 as an extraordinary item and the ₹6,00,000 as an exceptional item, each with its nature and amount stated separately.

Answer: (a) Extraordinary item of ₹4,00,000, shown separately. (b) Exceptional item (income) of ₹6,00,000, shown separately. (c) Ordinary item, no separate disclosure.

Example 2

For the year, a company following AS has revenue from operations of ₹80,00,000, other income of ₹2,00,000 and total expenses of ₹60,00,000, which exclude the items below. It also has an exceptional income of ₹5,00,000 from disposal of a long-term investment and an extraordinary loss of ₹3,00,000 from an uninsured earthquake. Ignore tax. Show the profit flow as per the Schedule III Division I order.

Show the solution

Profit before exceptional and extraordinary items and tax = ₹80,00,000 + ₹2,00,000 − ₹60,00,000 = ₹22,00,000.
Add exceptional income: ₹22,00,000 + ₹5,00,000 = ₹27,00,000. This is the profit before extraordinary items and tax.
Deduct the extraordinary loss: ₹27,00,000 − ₹3,00,000 = ₹24,00,000. This is the profit before tax.
Disclose the exceptional income of ₹5,00,000 and the extraordinary loss of ₹3,00,000 separately, each with its nature.

Answer: Profit before exceptional and extraordinary items and tax ₹22,00,000; profit before extraordinary items and tax ₹27,00,000; profit before tax ₹24,00,000.

Exam tips

In MCQs, the usual trap is swapping the two terms. Check whether the event is outside ordinary activities (extraordinary) or inside them (exceptional).
In written answers, quote the definition first, then apply it. Marks are given for the reasoning, not only for the label.
Always write the nature and amount of each item as a separate disclosure line. This is a common mark-earning step.
Practise the line order of the Schedule III Division I profit flow, since numerical questions often ask for profit before extraordinary items and tax.
If a question seems unclear on classification, state your assumption, such as 'assuming the event is not expected to recur', and proceed.

Practice questions from AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Extraordinary Items and Items of Exceptional Nature: frequently asked questions

What is the difference between extraordinary items and exceptional items in AS 5?

An extraordinary item comes from an event clearly distinct from ordinary activities and is not expected to recur frequently or regularly. An exceptional item belongs to ordinary activities but is unusual in size, nature or incidence. Both are disclosed separately, but they are different categories.

What are examples of extraordinary items in AS 5?

AS 5 gives the attachment of an enterprise's property and an earthquake as examples. Whether an event is extraordinary still depends on the enterprise and its ordinary activities.

How are extraordinary items disclosed under AS 5?

They are shown in the statement of profit and loss as part of the net profit or loss for the period. The nature and amount of each item must be stated separately so the effect on current profit or loss can be seen.

Are exceptional items part of ordinary activities?

Yes. They are items of income or expense within the profit or loss from ordinary activities. AS 5 (para 12) lists the circumstances where such items are disclosed separately, and they are commonly called exceptional items. They are disclosed separately only when their size, nature or incidence is such that the reader needs this to understand the enterprise's performance.