Are exceptional items the same as extraordinary items?

No. Extraordinary items were a narrower, older category of events outside the ordinary activities of a business, shown below the ordinary result. IAS 1, as adopted in New Zealand and Australia and by UK groups that use IFRS, prohibits presenting any item as extraordinary, and FRS 102 does the same for most UK companies. Exceptional items are a presentation choice inside the ordinary result: an item is shown separately because of its size or nature, not because it arose outside the business.

Should exceptional items be added back to EBITDA?

Only those that will not happen again, and only if they were deducted in arriving at EBITDA in the first place. A lender reads the line across several years. A cost that appears most years stays in. A gain that cannot repeat comes out, even if the accounts did not label it exceptional. A write-down below EBITDA needs no adjustment. The facility agreement may then set its own rules on what the borrower can add back for the covenants.

What is the difference between exceptional and non-recurring items?

The words are often used as if they meant the same thing, but they make different claims. Exceptional describes an item's size, nature or incidence in the year it happened. Non-recurring is a prediction that it will not happen again. A large restructuring can be exceptional in size and still recur every year. A lender tests the prediction against the history rather than accepting either word.

Where do exceptional items appear in the accounts?

Usually as a separate line or column in the income statement, or in a note analysing material items, often headed significant items in New Zealand and Australian accounts. The provisions note shows how much of a restructuring charge has yet to be paid, and the cash flow statement shows what was paid in the year. Smaller companies' special-purpose accounts may show none of this, and the items are then traced through the management accounts.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Exceptional Items: a Worked Example

A cost that comes every year is not exceptional to the bank.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07 · 5 MIN READ

// THE SHORT ANSWER

When a borrower's accounts carry an exceptional items line, a lender's question is whether the money will move again. A restructuring charge, a write-down or a gain on a property sale is pulled out of the results as unusual, and the borrower's adjusted EBITDA usually begins by excluding it. The lender rebuilds the figure from several years of accounts instead: costs that keep coming stay in earnings, gains that will not repeat come out, items already below EBITDA are not added back a second time, and the cash those items cost is counted in the cash flow whatever their label says.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WORK THE SUM

Every Groundwork file that is a number to work out — cash conversion, debt service cover, expected loss, risk-weighted assets, the margin on a bank's own book — with the working shown in the senior read. One minute each, no signup.

Open The Number →

PART OF Credit Analysis for Beginners

// 01 — WHY A LENDER READS THE LINE TWICE

The label is the preparer's choice. Neither IFRS nor the UK's FRS 102 defines an exceptional item. What the rules do require is narrower: under IAS 1, as adopted in New Zealand and as AASB 101 in Australia, a business must disclose the nature and amount of a material item of income or expense, and it may not call anything extraordinary. In the UK, the accounts regulations for small, medium-sized and large companies require the amount and nature of any item of exceptional size or incidence to be stated. Which items go in the line, and which stay among ordinary costs, is left to judgement.

That judgement matters to a lender because debt is sized as a multiple of earnings and tested against them. Every dollar moved out of costs is a dollar of EBITDA, and at three or four times leverage it supports three or four dollars of borrowing. Many smaller private companies in New Zealand and Australia prepare special-purpose or tax-basis accounts with no exceptional line at all, and there the same question is asked of the management accounts and the ledger.

// 02 — HOW A LENDER SORTS THE ITEMS

EBITDA as reported (after every item inside it)

+ costs that did not occur before and will not occur again

− gains that will not occur again

± nothing for items that sit below EBITDA already

= EBITDA a lender will lend against

Four questions do the sorting. Has the item appeared before? A run of three to five years answers that better than any note. Is it part of how this business earns its money? A retailer closes stores, a fleet operator sells vehicles at a gain, a contractor exits contracts, and each does so as a matter of course. Where does it sit? A goodwill impairment or an amortisation charge is already below EBITDA, so adding it back to EBITDA counts it twice. And when did the cash move? A restructuring provision is charged in one year and often paid in the next, which the provisions note and the cash flow statement show.

// 03 — THE EXAMPLE

A contract caterer serving hospitals and schools, constructed for this page like every figure in it, has net debt of US$30m. Each year it loses some contracts and closes those kitchens, paying redundancy and exit costs it reports as exceptional. In the latest year it also sold a central production kitchen at a gain, booked in other income and not labelled exceptional. A goodwill impairment of US$2.0m sits below EBITDA. Figures are in US$m.

Year 1 Year 2 Year 3

EBITDA as reported 7.3 7.5 9.8

Restructuring (exceptional) 0.9 1.1 0.8

Gain on kitchen sale – – 1.5

Borrower's EBITDA, Year 3: 9.8 + 0.8 = 10.6

Lender's EBITDA, Year 3: 9.8 − 1.5 = 8.3

Borrower's leverage: 30 ÷ 10.6 = 2.83×

Lender's leverage: 30 ÷ 8.3 = 3.61×

The borrower adds back the restructuring and keeps the gain. The lender does the reverse. Closing kitchens when contracts end has cost between US$0.8m and US$1.1m in each of three years, so it is a cost of running a contract business and stays in. The kitchen can be sold only once, so the gain comes out, whatever line it was booked in. The impairment changes neither figure. The gap is more than three-quarters of a turn of leverage on the same business. The levels are the example's, not a market norm.

// 04 — HOW IT DIFFERS FROM ADJUSTED EBITDA

The exceptional line is the accounts' own separation, prepared under a reporting framework and, where the accounts are audited, inside the audit. Adjusted EBITDA is the borrower's argument built on top of it, and it often reaches further: savings not yet made, a full year of an acquired business (pro forma EBITDA), or a recent improvement annualised (run-rate EBITDA). A lender reconciles the two figures item by item. IFRS 18, which applies from 2027, will bring management's own performance measures into a note when a company uses them in public communications; a private borrower whose adjusted figure appears only in its bank pack may have no such note.

DEFINED IN ONE PARAGRAPH → · THE ADD-BACK CAP → · QUALITY OF EARNINGS →

// 05 — WHERE IT DECIDES A FILE

It decides the covenant definition. Many facility agreements let the borrower add back exceptional, one-off or non-recurring items when EBITDA is calculated for the covenants, and the negotiation is over who decides what qualifies: the label in the accounts, a test of whether the item recurs, or a cap on the total. A lender that accepts the label has let the borrower's accountant set its covenant.

It also decides the cash reading. Whatever happens to EBITDA, the caterer paid out its redundancy costs, and a debt service cover built on adjusted earnings has to take that cash off again. A lender that adds back a cost for leverage and forgets it for cash flow has lent against money the business did not keep.

FINANCIAL REPORTING, READ BY A LENDER → · DEBT TO EBITDA →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Australian Accounting Standards Board, AASB 101 Presentation of Financial Statements (compilation as at 31 December 2022), the Australian text of IAS 1 — paragraphs 87, 97 and 98 — Requires the nature and amount of material items of income and expense to be disclosed separately, gives restructurings and disposals of property, plant and equipment as examples, and prohibits extraordinary items — sections 01 and the first FAQ.
UK legislation, The Small Companies and Groups (Accounts and Directors' Report) Regulations 2008 (SI 2008/409), Schedule 1, paragraph 61; and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410), Schedule 1, paragraph 69 — Requires the amount and nature of individual items of income or expenditure of exceptional size or incidence to be stated, with their effect also required for medium-sized and large companies — section 01.

// QUESTIONS PEOPLE ASK

Are exceptional items the same as extraordinary items?: No. Extraordinary items were a narrower, older category of events outside the ordinary activities of a business, shown below the ordinary result. IAS 1, as adopted in New Zealand and Australia and by UK groups that use IFRS, prohibits presenting any item as extraordinary, and FRS 102 does the same for most UK companies. Exceptional items are a presentation choice inside the ordinary result: an item is shown separately because of its size or nature, not because it arose outside the business.
Should exceptional items be added back to EBITDA?: Only those that will not happen again, and only if they were deducted in arriving at EBITDA in the first place. A lender reads the line across several years. A cost that appears most years stays in. A gain that cannot repeat comes out, even if the accounts did not label it exceptional. A write-down below EBITDA needs no adjustment. The facility agreement may then set its own rules on what the borrower can add back for the covenants.
What is the difference between exceptional and non-recurring items?: The words are often used as if they meant the same thing, but they make different claims. Exceptional describes an item's size, nature or incidence in the year it happened. Non-recurring is a prediction that it will not happen again. A large restructuring can be exceptional in size and still recur every year. A lender tests the prediction against the history rather than accepting either word.
Where do exceptional items appear in the accounts?: Usually as a separate line or column in the income statement, or in a note analysing material items, often headed significant items in New Zealand and Australian accounts. The provisions note shows how much of a restructuring charge has yet to be paid, and the cash flow statement shows what was paid in the year. Smaller companies' special-purpose accounts may show none of this, and the items are then traced through the management accounts.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE CALL · THE LOAN · CAPACITY

A US$35m loan was sized on EBITDA of US$10m. Halfway through the year, management cuts its forecast to US$7m.

What changes?

5 MORE ON THE LOAN · CAPACITY →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHExceptional items (non-recurring items) What are exceptional items in the accounts, and does a lender add them back?