An extraordinary cost is a one-time expense that is not part of the regular cost of doing business. It is also called a nonrecurring expense because of its nature; accountants do not expect to see it repeated in the future. An example might be the cost associated with rebuilding a business after a natural disaster. It is unlikely to see a repeat of the same disaster, and thus the unusual expense probably won’t happen again.
There are several settings in which extraordinary costs can be important. One is on tax documentation, where such expenses can be documented as a loss. The company spent or borrowed money to meet a need, and is entitled to use this as a write off to reduce tax liability. In some special cases, the extraordinary cost may be treated as a tax credit the company can take directly off the total tax due, usually by legislative mandate for truly unique events. Other situations allow companies to claim it against their taxable income.
In addition, companies may need to discuss extraordinary costs on statements, both for internal and external use. Internally, members of a firm need to be aware of the kinds of expenses incurred and why so they can plan appropriately. The company may have less money available or could need to push back a project to meet a need. Making policymakers and administrators aware of the situation can help the company recover more quickly, as they can budget their activities with this in mind.
Investors and creditors may also have concerns about an extraordinary cost. Typically, they will want to know if a company’s major losses in a given financial period are likely to be repeated, and how they were incurred in the first place. Financial declarations can discuss these expenses and provide context to reassure investors. For example, a company might spend a substantial sum on entirely new facilities to get into compliance with major legislation, which would generate a loss, but benefits the firm in the long term.
Accountants and analysts can work with a company to determine what constitutes an extraordinary cost. Auditors tend to look at costs and earnings classified in this way very closely, to make sure they are not false claims. A company trying to conceal the fact that it is failing, for example, might attempt to hide recurring expenses in the extraordinary cost column to make it look like it isn’t doing poorly.