The Financial Accounting Standards Board (“FASB”) has issued its first accounting standards update of 2015. Simply put, FASB wishes to inform preparers of financial statements that there is nothing special about the results they are reporting, i.e., the end of the concept of “Extraordinary Items” on Income Statements.
Accounting Standards Update No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, explains the change. It is an amendment to the FASB Accounting Standards Codification, which in turn is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective.
The Updated Standard eliminates the prior GAAP requirement that items be reported as extraordinary, and separated from other income results, when they were both unusual and infrequent, as defined below:
“1. Unusual nature. The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates.
2. Infrequency of occurrence. The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates.”
The change was made as part of FASB’s Simplification Initiative. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of GAAP where cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements. FASB concluded that the time and effort involved in assessing whether any transactions met the definition of extraordinary was not justified given the relatively few circumstances that transactions actually fit the requirements. For instance, FASB agreed that the eruption of Mount St. Helens was extraordinary, as it had been 130 years since it last occurred. Yet, FASB instructed that the following events did not meet the criteria:
- The September 11th terrorist attacks, which FASB deemed “certainly extraordinary, [yet] the financial reporting treatment that uses that label would not be an effective way to communicate the financial effects of those events and should not be used in this case.”
- Hurricane Katrina, for which FASB responded “unfortunately every year many businesses across the country are affected by these types of events and thus they do not represent an unusual and infrequent occurrence to businesses or to insurers.”
The amendment is effective for periods beginning after December 15, 2015, although early adoption is permitted. The new GAAP has the added benefit of more closely aligning with international standards (another FASB goal), as IAS 1, Presentation of Financial Statements, prohibits the presentation and disclosure of extraordinary items.
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