FASB Elimination of the Concept of “Extraordinary Items”

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<p style=”margin-bottom:0in;margin-bottom:.0001pt;text-indent: .5in;line-height:200%”>The Concept of Extraordinary Items</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Currently, all entities in the financial statements are presumed usual when they are within they are within the ordinary course of the business. These are entities that occur on daily basis and are expected to occur frequently. However, when an event of the transaction is unusual in nature, does not occur frequently, or is not within the ordinary course of business, that entity is classified as an &ldquo;extraordinary item&rdquo; (Flood, 2015). An extraordinary item is reported separately in the income statement, net tax, and after all overall income from continuing operations (Flood, 2015). Any revenues or losses resulting from the extraordinary item is disclosed on the financial statements.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; For an item, event or transaction to be considered as &ldquo;extraordinary&rdquo;, it must meet two primary conditions: They have to be unusual in nature and infrequent in occurrence (Griggs, Doyle, &amp; Donahue, 2015). That is, the item should be abnormal and only in the context of the activities of a business entity. Additionally, there should be no expectation of the event or transaction to happen in the foreseeable future. These two criteria need to be evaluated in the business environment.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; To its complex nature, the concept of &ldquo;extraordinary item&rdquo; has been a source of confusion and annoyance to corporate financial statement accountants for years (Flood, 2015). Stakeholders have no fixed order to explain when an item is unusual in nature, or infrequent in occurrence. For example, questions have been raised concerning the classifications of hurricanes, like Hurricane Katrina (2005), tsunamis like the Japanese tsunami of 2011, and other natural and climatic events. While such events affect business entities, there is a disagreement within the corporate stakeholders on whether to include them as extraordinary items on the financial statements. Moreover, it is not easy to determine whether such events all the corporate members at all.</p>
<p align=”center” style=”margin-bottom:0in;margin-bottom:.0001pt; text-align:center;line-height:200%”><b>&nbsp;</b></p>
<p align=”center” style=”margin-bottom:0in;margin-bottom:.0001pt; text-align:center;line-height:200%”><b>FASB Elimination of the &ldquo;Extraordinary items&rdquo;</b></p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The stakeholders in the corporate world voiced their concern that the concept of extraordinary items causes uncertainty in the reporting of financial reports. Reacting to such concerns, Financial Accounting Standards Board (FASB) in 2015 issued an update &ndash;Accounting Standards Update (ASU) &ndash; number 2015-01, of the Income Statement (225-20) to simplify the presentation of financial reports (FASB, 2014). By eliminating the concept of extraordinary items, the standard setters aimed at simplifying the income statement reporting, therefore promoting the consistency between entities. This was part of FABS intention of simplification initiative.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; By eliminating the concept of extraordinary items from the income statements, the United States accepted the accounting principles (GAAP) that would require entities to present activities that are &ldquo;unusual and infrequent&rdquo; separately within the income resulting from a continuous operation on the pretax basis. In addition to that, the entities were prohibited from separately presenting the net-of-tax after income from continuing operations (Flood, 2015). The nature of the unusual or infrequent transaction, event, or item is to be disclosed on the face of the income statement, though separately, or note these events on the financial statements. That is, the entities have to label the item, event, or transaction rather than calling the extraordinary.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The standards in existence exclude various items that would be considered extraordinary (Wahlen, Jones, &amp; Pagach, 2015). These include receivables write-downs or write-offs, inventories, and various intangible assets; the gains and losses resulting from foreign currency; the losses and gains that result from components disposals such as property, plants, and equipment; and the gains and losses that a company encounters from personnel strikes. The current standards cover unusual or infrequent items like those directly resulting from major casualties like expropriation or earthquakes and other natural disasters.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Personally, I support FABS decision of eliminating the concept of extraordinary items. The decision does not reduce the information of the events that would be previously be classified as extraordinary. In a way, the change will bring about a greater transparency that will offer clarify the financial reporting while providing the useful information about non-ordinary items. However, with the reduced standards (classifying unusual or infrequent items separately), the entities may decide to increase the number of items classified as Unusual or Infrequent Occurring, as the items or transactions must only meet the two conditions (Wahlen, Jones, &amp; Pagach, 2015). This means that as long as the company can prove that the item, event or transaction does not occur frequently, or is unusual in nature, they are free to classify them separately, reflecting as shrunk or exaggerated income statement.</p>
<p style=”margin-bottom:0in;margin-bottom:.0001pt;line-height: 200%”>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This FASB&rsquo;s initiative has some effects on quality of the earnings of a company or financial entity. Previously, companies had to report the tax effects of the items, transactions, or events. This process involved a series of complex calculations that relate the items within the financial reporting period. Separately, the companies would need to report the effects of the events on the earnings per share (Flood, 2015). With the changed rules, business entities only have to report the effects of any unusual or infrequent events before the tax, which means that the tax calculation will no longer be considered. One thing that will not change, however, is the fact that companies will have to calculate and decide the effects of unusual or infrequent events to the finances of the companies, though not reflected on the income statement. Due to that, the quality of the earnings will be somehow affected.</p>

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