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FASB Publishes Proposal to Eliminate Extraordinary Items from US GAAP
Practical Law Legal Update 9-574-8466 (Approx. 3 pages)
FASB Publishes Proposal to Eliminate Extraordinary Items from US GAAP
by Practical Law Corporate & Securities
| Published on 16 Jul 2014 • USA (National/Federal) |
The Financial Accounting Standards Board (FASB) issued an exposure draft of a proposed Accounting Standards Update (ASU) that would eliminate the concept of extraordinary items from US generally accepted accounting principles (US GAAP).
On July 15, 2014, the Financial Accounting Standards Board (FASB), the entity responsible for US generally accepted accounting principles (US GAAP), issued an exposure draft of a proposed Accounting Standards Update (ASU) that would eliminate the concept of extraordinary items from US GAAP. The proposed ASU is part of a simplification initiative by the FASB to identify, evaluate and improve areas of US GAAP for which cost and complexity can be reduced, while maintaining or improving the usefulness of the information provided to users of financial statements.
Currently, Subtopic 225-20, Income Statement − Extraordinary and Unusual Items, requires companies to separately classify, present and disclose extraordinary events and transactions in their financial statements. The following criteria must be met for events and transactions to be classified as extraordinary, taking into account the environment in which the company operates:
- Unusual Nature. The event or transaction has a high degree of abnormality and is of a type clearly unrelated, or only incidentally related, to the ordinary and typical activities of the company.
- Infrequency of Occurrence. The event or transaction is of a type that would not reasonably be expected to recur in the foreseeable future.
If an event or transaction meets this criteria, a company must:
- Segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations.
- Disclose applicable income taxes and present or disclose earnings-per-share data applicable to the extraordinary item.
The FASB stated that eliminating the concept of extraordinary items would save time and reduce costs for preparers and reduce uncertainty for preparers, auditors and regulators. According to the FASB, the proposed ASU would not result in a loss of information because, while the proposed ASU would eliminate the requirement in Subtopic 225-20 to consider whether an event or transaction is extraordinary, the presentation and disclosure guidance for items that are of an unusual nature or occur infrequently would be retained. Further, the proposed ASU would more closely align US GAAP income statement presentation guidance with International Accounting Standard 1, Presentation of Financial Statements, which prohibits the presentation and disclosure of extraordinary items.
If adopted, the FASB expects that the proposed ASU would apply prospectively to extraordinary items in annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Companies would be permitted to adopt the new rules before that date. When transitioning, a company would be required to disclose, if applicable, that an item included in income from continuing operations relates to an adjustment of an item previously separately classified and presented as an extraordinary item before adoption of the proposed ASU.
The FASB is accepting public comments on the proposed ASU until September 30, 2014.
To learn more about financial reporting in the US, see Practice Notes, Financial Reporting in the US: Basic Concepts and Financial Reporting in the US: Key Topics for Corporate Counsel.