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Extraordinary Items Eliminated From U.S. GAAP

Businesses no longer will have to assess whether a one-time event is considered so rare that it merits separate reporting as an “extraordinary item.” The amendment is part of a FASB effort to simplify narrow, confusing areas of U.S. GAAP.

The FASB on January 9, 2015, eliminated the seldom-used concept of “extraordinary items” from U.S. GAAP.

The standard-setter erased the concept via Accounting Standards Update (ASU) No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20) Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.

The update is part of the board’s effort to simplify parts of the Accounting Standards Codification. The FASB identified reporting of extraordinary items as an area needing change because it is “extremely rare” for businesses to report extraordinary items, but businesses, auditors, and regulators still have to spend time deciding whether an event merits special reporting, the FASB wrote in the update.

Subtopic 225-20, Income Statement — Extraordinary and Unusual Items, (formerly Accounting Principles Board (APB) Opinion No. 30), defined an extraordinary item as a transaction that is both unusual and isn’t expected to recur in the foreseeable future.

If an event met both criteria, a company was supposed to segregate the item from the results of ordinary operations and show it separately in the income statement, net of tax, after income from continuing operations. The company was also supposed to disclose or present the tax effect of the item and its effect on earnings per share.

But the threshold was considered so high that very few businesses reported extraordinary items. When the FASB started discussing eliminating extraordinary items, the board’s research staff members found only 30 instances from the past five years when extraordinary items were reported.

Events such as the September 11, 2001, terrorist attacks and the Japanese tsunami and Fukushima nuclear reactor crisis in 2011, never qualified as extraordinary items, FASB members said in May, when they first started discussing the changes.

“The term extraordinary causes uncertainty because it is often unclear when an item should be considered both unusual and infrequent, and what might be considered extraordinary in one industry may not be considered extraordinary to another,” the FASB wrote in the basis for conclusions for ASU No. 2015-01. “Additionally, the concept of extraordinary items has been interpreted narrowly in practice, so entities rarely, if ever, reach a conclusion that the conditions for presentation have been met.”

With the amendment, businesses and other organizations will report transactions that are either unusual or rare on the income statement or disclose them in their financial statement footnotes.

The amendments will be effective for 2016 fiscal years, starting with financial statements for the first quarter. The accounting board said the amendments can be adopted in 2015 provided that companies apply them at the start of the year.

A draft version of the changes was published in July 2014 as Proposed ASU No. 2014-220, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.

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