By Eric Woodruff, CPA
Manager, Audit & Assurance Services
In January 2015, the Financial Accounting Standards Board (FASB) released Accounting Standards Update 2015-01 that eliminates the concept of “Extraordinary Items.”
The change is made in an effort to reduce complexity for financial statement preparation.
Historically, extraordinary items were defined as an event or transaction that was unusual in nature and infrequent in occurrence.
The purpose of this classification was to remove extraordinary events from operating income on financial statements so it would be clear to the user this event was truly extraordinary.
The elimination of this concept is effective for financial statement years beginning after December 15, 2015 — so the concept of extraordinary items will not be available for calendar-year 2016 financial statements.
In theory, this is a useful concept. In practice, however, transactions very rarely met the qualifications to be classified as extraordinary. As such, the removal of the extraordinary items concept from accounting principles generally accepted in the United States of America will not have a big impact on financial statement users or preparers.
The following events or transactions are listed in the FASB Codification as examples of those that did not meet the Extraordinary Item Criteria:
- A citrus grower’s Florida crop is damaged by frost. Frost damage is normally experienced every three or four years. The standard of infrequency of occurrence based upon the environment in which the entity operates would not be met, since the history of losses caused by frost damage provides evidence that such damage may reasonably be expected to recur in the foreseeable future.
- A large diversified entity sells a block of shares from its portfolio of securities that it has acquired for investment purposes. This is the first sale from its portfolio of securities. Since the entity owns several securities for investment purposes, it should be concluded that sales of such securities are related to its ordinary and typical activities in the environment in which it operates, and thus the standard of unusual nature would not be met.
- A textile manufacturer with only one plant moves to another location. It has not relocated a plant in 20 years and has no plans to do so in the foreseeable future. Notwithstanding the infrequency of occurrence of the event as it relates to this particular entity, moving from one location to another is an occurrence which is a consequence of customary and continuing business activities, such as finding more favorable labor markets, more modern facilities and closer proximity to customers or suppliers. Therefore, the criterion of unusual nature has not been met and the moving expenses (and related gains and losses) should not be reported as an extraordinary item.
- A consequence of customary and typical business activities (namely financing) is an unsuccessful public registration, the cost of which should not be reported as an extraordinary item.
- The costs incurred by an entity to defend itself from a takeover attempt, or the cost attributed to a standstill agreement, do not meet the criteria for extraordinary classification.
If you have any questions about how the new rules could affect your financial reporting, please call Eric Woodruff at (317) 613-7850 or email [email protected].