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Simplification of U.S. GAAP Becomes a Priority

June 3, 2014

The FASB plans to release in July two proposals that the board hopes will make targeted simplifications to U.S. GAAP. The board wants to eliminate the seldom-used concept of “extraordinary items.” The FASB also wants to simplify the measurement of inventory.

The FASB on May 28, 2014, moved to get rid of the concept of “extraordinary items” from U.S. GAAP and simplify the subsequent measurement of inventory.

The proposals will be released for public comment in July, and the public will have three months to submit responses, board members agreed.

The projects are part of what the standard-setter is calling its “simplification initiative,” an effort to target complicated parts of U.S. GAAP and make them easier for accountants to apply. The FASB’s research staff described the two issues as relatively simple matters that can be resolved quickly.

Subtopic 225-20, Income Statement — Extraordinary and Unusual Items, requires a business to classify, present, and disclose one-time events and transactions. An event is considered an “extraordinary” item if it’s unusual and isn’t expected to recur in the foreseeable future.

If an event meets both criteria, the company must segregate the item from its income in continuous operations and present the tax effect of the item and its effect on earnings per share.

The threshold is considered so high, however, that very few companies report extraordinary items — the FASB’s research staff found 30 instances in the past five years of companies reporting extraordinary items. FASB Vice Chairman James Kroeker said that events that most people would judge to be extraordinary, such as the terrorist attacks of September 11, 2001, and the Japanese tsunami and Fukushima nuclear reactor crisis in 2011, were never reported as extraordinary items.

“I think that did accountants a disservice when we said those things weren’t extraordinary, so eliminating that concept helps,” Kroeker said.

“Effectively the concept really doesn’t exist, and if I were to think of the term ‘extraordinary,’ I would think more events would actually qualify, personally,” FASB member Lawrence Smith said. “But we, collectively — standard-setters, the SEC — have effectively just reduced the concept down to blowing up the world or something like that.”

The FASB wants to limit the changes to Subtopic 225-20. Under existing accounting, if a company has either an unusual or infrequent event, it must present the item separately, but it doesn’t have to calculate the tax effect or the effect on per-share earnings.

“I am glad we are going to continue requiring separate presentation of materially unusual or infrequent items because I think it’s important for users to be able to see if there is really a material unusual or infrequent item that’s occurring,” FASB member Thomas Linsmeier said.

With the effort to simplify inventory accounting, the board wants to update Topic 330, Inventory, which originated with guidance that hasn’t been updated since 1947, FASB research staff members told the board. The guidance requires businesses to measure inventory at the lower of cost or a market price and is described as equaling the cost to replace the item. The market price can be higher than the value a business might realize from a sale, but it can’t be lower than that amount, FASB fellow Jennifer Hillenmeyer told the board.

“The three measures of inventory described in Topic 330 make the guidance unnecessarily complex,” Hillenmeyer said. “Some entities don’t understand whether you have to think about these three measures specifically, or if it’s just a guide. Others said the only time they have a write-down is the result of when the net realizable value replacement cost approximates what is on the books because inventory is turning over fairly fast.”

The staff suggested to the board that Topic 330 be amended to require measuring inventory at the lower of cost or fair value.

The FASB plans to continue to look for other relatively quick projects that could make U.S. GAAP simpler to apply. Once the comment period ends for the two forthcoming proposals, the FASB will likely take steps to issue other simplification-related proposals, FASB Chairman Russell Golden said.

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