More Simplified Accounting for Extraordinary Items
In continuation of the Financial Accounting Standards Board’s (FASB) Simplification Initiative, FASB published a proposed accounting standards update (Proposed ASU 2014-220), which would eliminate the concept of extraordinary items from U.S. Generally Accepted Accounting Principles (GAAP). Presentation of items as extraordinary is uncommon due to the narrow interpretations of the term, yet its possibility costs both preparers of financial statements and auditors a considerable amount of resources to determine whether items are properly classified. Removal of the extraordinary item status is intended to reduce the complexity of financial statements while maintaining usefulness.
Extraordinary items are items which are both unusual in nature and infrequent in occurrence. An item is assumed to be ordinary unless evidence clearly fits this definition. Current GAAP requires extraordinary items to be shown on the income statement after income from continuing operations. It also requires separate disclosure of related income taxes and its impact on earnings-per-share.
In FASB’s proposed amendment, the concept of extraordinary items would be removed from GAAP and unusual and infrequent items would be included in income from continuing operations in the income statement with disclosure of the specific item required. FASB believes this proposed change would simplify the preparation and review of the income statement while maintaining usefulness for users of the financial statements.
The comment period ended September 30, 2014 and it is anticipated that the proposed changes will be effective for annual and interim periods beginning after December 15, 2015. FASB has concluded that these changes are to be applied prospectively and early adoption will be permitted. The final effective date will be determined once FASB has considered the comments received.
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