An extraordinary loss is a term that is used to describe a financial loss that occurs for reasons that would have been difficult if not impossible to forecast. Losses of this type may be due to the occurrence of some type of unforeseen natural disaster, acts of extreme vandalism, terrorist activity, or even sudden changes in the marketplace that cause demand for a company’s goods and services to plummet. Typically, an extraordinary loss is something that happens once and is not likely to be repeated again in the near future.
One example of an extraordinary loss has to do with the need to sell off some asset of the company immediately whilebeing unable to interest buyers at a price that is at or slightly above the current value of that asset. When this is the case, the need to sell quickly may override the ability to hold off the sale until a more equitable price can be obtained. As a result, the asset is sold at a loss that was not initially anticipated, making that loss somewhat unusual or out of the ordinary. The sale at the below market value price will also necessitate documenting the loss in the company’s accounting records in a manner that makes it possible to flag the transaction for a possible tax deduction.
Businesses may also experience an extraordinary loss as the result of a natural disaster. Wind damage, flooding, and even fires may seriously cripple the ability of a company to do business, which results in the loss of sales revenue as well as the loss of facilities, equipment, and possibly even information that is contained in databases that are damaged and not recoverable. Unusual losses of this type may be sufficient to undermine the company for an extended period of time, even allowing for protections such as backup data sources and insurance coverage that makes it possible to rebuild. As a result, the company may operate at a loss for some time before beginning to be profitable once more.
The general rule with declaring an extraordinary loss is that the event be something that is highly unlikely to occur, and then only has any real potential to occur on an infrequent basis. For example, a business located in a business district that has been flooded once in the last three decades would be able to properly refer to flood damage to the facility as an extraordinary loss. In contrast, a business located in an area that experiences wind damage from tornadoes on an annual basis would be much less likely to be able to class the event as being unusual or extraordinary.