Only unusual and inregular events pass muster under FASB 145. BY THERESA F. HENRY AND MARK P. HOLTZMAN

You are watching: Which of the following items should be classified as an extraordinary item on an income statement?


EXECUTIVE SUMMARY Material gains and also losses are classified as “extraordinary” on the revenue statement when they are both “unusual” and “infrequent.” Extrasimple items are reported at the bottom of the revenue statement, net of their taxation results.

FASB Statement no. 145 significantly shortened the list of extraplain items by repealing the need that all early on extinguishment of debt be treated as extrasimple. This eliminated most gains and also losses formerly treated as extrasimple items.

Whether an occasion is unusual depends on the environment in which the entity operates, taking into account components such as the features of the industry or industries in which it operates, the geographical area of its operations, and the nature and also degree of governpsychological regulation.

The past incident of an event or transactivity provides some proof of the probability of recurrence of that kind of event or transaction in the foreseeable future in determining whether the event is sufficiently inconstant.

Theresa F. Henry, CPA, Ph.D., is an assistant professor of accounting and taxes at Seton Hall College, Stillmale School of Business. Mark P. Holtzmale , CPA, Ph.D., is an assistant professor of accountancy and also tax at Seton Hall College, Stillguy School of Firm. Their e-mail addresses are henrythe
and also holtzmma
, respectively.

The extraordinary item still appears on some companies’ income statements, but it’s much less prevalent than it provided to be, mostly because of FASB Statement no.145, introduced in 2002. This ongoing a trend among standard-setters toward more restrictive criteria for which items deserve to be classified as extrasimple.

Material gains and also losses are classified as extrasimple on the earnings statement just when they are inexplicable and inconstant . Extrasimple items are reported at the bottom of the income statement, net of their earnings tax effects.

The following examine surveys even more than 16,000 public companies’ financial statements, measuring the frequency of extraplain items and also identifying particular types of gains and also losses that have freshly been reported as extrasimple. This write-up will certainly help practitioners detect gains and also losses that might fit within the narrowhead meaning of extraordinary items.

THE EXTRAORDINARY ITEM CLUB Statement no. 145 significantly shortened the list of extraordinary items by repealing the requirement of Statement no. 4, Reporting Gains and also Losses From Extinguishment of Debt, that at an early stage extinguishment of debt be treated as extraplain. By 2004, Accounting Trends and also Techniques found simply 4 items reported (out of 600 carriers surveyed). Of the 78 extrasimple items reported in 2001, all yet eight regarded the at an early stage extinguishment of debt.

Our more comprehensive survey of 16,000 carriers shows less than 0.2% of publicly traded providers reported extraplain items in 2004.

SELECTIVITY KEEPS THE CLUB EXCLUSIVE APB Opinion no. 9, Reporting the Results of Operations, issued in 1966, characterized extraordinary items as those “of an extraordinary nature and also whose results are product.” Examples contained disposal of a plant (or a significant segment of the business), sale of an investment not gained for resale, write-off of goodwill certainly, expropriation of properties and also major dtestimonial of a foreign currency.

In 1973, APB Opinion no. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Firm, and Extraordinary, Unusual and also Incommonly Occurring Events and also Transactions, tightened the criteria, so that to be classified as extraordinary, an event or transactivity need to be both inexplicable and infrequent.

What is “unusual?” To recognize an entity’s simple and typical activities, one must consider the certain characteristics of the entity, such as the type and also scope of operations, lines of service and also operating plans and environment. The setting contains determinants such as industry or industries in which it operates, its geographical place, and the nature and also extent of governpsychological regulation. Hence, according to APB Opinion no. 30, an event or transaction may be inexplicable for one entity however not for one more.

What is “infrequent?” According to the opinion, an inregular occasion or transaction is one that is not sensibly expected to recur in the foreseeable future. Because this determicountry also counts on the atmosphere in which an entity operates, what is extraplain for one entity might not be for an additional. The previous occurrence of an event or transactivity offers some evidence of the probability of recurrence of that type of occasion or transactivity in the foreseeable future.

The opinion identifies the adhering to gains and losses not thought about extraordinary:

Write-dvery own or write-off of receivables, inventories, devices leased to others, deferred research and also advance expenses, or other intangible assets.

Gains or losses from exadjust or translation of international currencies, including those relating to significant devaluations and also revaluations.

Gains or losses on disposals of a segment of a service.

Other gains or losses resulting from sale or abandonment of property, plant and devices supplied in the company.

Effects of a strike, including those versus rivals and major companies.

Adjustment of accruals on long-term contracts.

Properly reporting nonrecurring gains and also losses as extraplain items will certainly assist financial statement individuals exclude the results of inexplicable and inconstant items once evaluating a company’s operations.

FASB Statement no. 145 did not completely eliminate extrasimple therapy for material gains and losses from early on extinguishment of debt. It removed the FASB Statement no. 4 necessity that all such gains and also losses be treated as extraordinary. Early extinguishment of debt still may be an extraplain item if its event is unexplained and inregular under FASB Statement no. 145 and also APB Opinion no. 30.

Companies must discshed the nature and financial results of each occasion or transaction on the confront of the revenue statement or in notes to the financial statements.

FASB’s guidance in EITF 01-10 specifies that prices and also losses associated through the terror occasions of Sept. 11, 2001, must be classified as component of earnings from proceeding operations. The Task Force concluded these events were so wide-ranging and pervasive that extraplain item therapy would certainly not effectively interact their financial effects. The EITF did not carry out audit guidance for the impacts of Hurricane Katrina. In practice, then, the EITF eliminated both acts of terror and the majority of herbal catastrophes from the repertoire of extrasimple occasions. AICPA’s Technical Practice Aid 5400.05, Accounting and also Disclosure Guidance for Losses From Natural Disaster—Nongovernmental Entities, gives further guidance on just how to treat such losses.

Why Join the Club?

Analysts and various other public agency financial statement individuals commonly emphasis on net income prior to (1) gains or losses on disposal of a segment of operations and (2) extraplain gains and also losses. Because they do not expect these inexplicable and also inregular items to recur, experts mainly disregard them as soon as projecting future earnings and also cash flows. Accordingly, by classifying losses as extrasimple, agency supervisors ca rise regarded net earnings, financial users’ perception of profitcapability and analysts’ expectations for future net income.

In addition, company supervisors wishing to convey stable and predictable profit fads would desire to report net earnings that is “smoothly increasing.” One way to perform that is by reclassifying unusual and also inregular gains and losses out of earnings from continuing operations and also right into extrasimple items. This fits with the as a whole theory that items many indicative of future performance—earnings and also expenses from selling and also buying merchandise, for example—need to show up at the height of the earnings statement, while items leastern indicative of future performance—unexplained and infrequent gains and also losses—need to appear at the bottom of the income statement.

Furthermore, reporting losses as extraplain ca boost perceived profitcapability. FASB’s increasingly tight criteria for extraordinary items seem designed to stop the type of earnings manipulation that misleads investors.

MEET THE MEMBERS We searched the Compustat database, which consists of the financial statements of 16,378 publicly traded carriers, for extrasimple gains and also losses. For 2004, the most current year available, we discovered simply 27 providers, or 0.16% of the complete, reporting extraplain items.

The the majority of prevalent extraplain item was negative goodwill (11 companies or 41% of the complete number of extraplain items reported). In a business combicountry, if the fair worth of the net assets obtained exceeds the cost of the gained entity, the difference would certainly be tape-recorded as an extraplain acquire under FASB Statement no. 141.

The next many prevalent item resulted from early extinguishment of debt, reported by just five providers (19% of those reporting extrasimple items). As noted, Statement no. 145 did not entirely get rid of extrasimple treatment for material gains and also losses from early on extinguishment of debt. It eliminated the previous Statement no. 4 requirement that all such gains and losses be treated as extrasimple items. Under Statement no. 145, as under APB Opinion no. 30, such items should be inexplicable and also infrequent to obtain extraplain therapy (watch Exhilittle bit 1). One other company initially reported an extraordinary obtain on extinguishment of debt in 2004 but later amended its income statement to change this classification.


Disclosure Example Extrasimple Item: Early Extinguishment of Debt

Throughout 1989, the Company kind of gained from Competitive Technologies Inc. (“Competitive”) dramatically all of the assets that consist of the Company’s company with an Asset Acquisition Agreement. The purchase price was $6,000,000 to be passist with $500,000 down and $250,000 per year, boosting at a price of 5 percent per year. The Company type of taped the assets and also the responsibility net of imputed interemainder. The Company type of defaulted on the duty to Competitive and during 1994 the Company gone into into negotiations via them for relief through respect to the note payable. As an outcome of pending litigation instituted during August 2003, in October 2003 the Company kind of and Competitive gone into right into a negotiation agreement in link via this debt. Under the terms of the negotiation agreement, all prior duties of the Company have been irrevocably terminated in exchange for a $1,250,000 non-interest-bearing installment note, secured by the assets of the Company kind of subordinate only to the defense interest granted to UNIINVEST Holding AG (Keep in mind 7). The negotiation calls for a $100,000 payment on the signing of the agreement (paid) and quarterly payments start on December 31, 2003, for the better of (i) $100,000 or (ii) an amount equal to 50 percent of the royalties received by the Company from Bausch & Lomb during the quarter ending on the payment due day. On the day of the negotiation agreement, the Company kind of known a one-time extraplain gain of approximately $1,952,000 which is net of associated expenses and also applicable earnings taxes of $1,178,050. At June 30, 2004, the Company kind of owed $838,139 on this note.

Four companies (15%) reported extraplain gains or losses from discontinuance of regulatory bookkeeping. When an entity no much longer offers FASB Statement no. 71, Accounting for the Effects of Certain Types of Regulation, the resulting gains and also losses should be treated as extraordinary under FASB Statement no. 101. This might occur as soon as there is deregulation or a change in the regulation technique or competitive atmosphere for the enterprise’s regulated solutions or products. The gain or loss would result from eliminating assets and liabilities (under Statement no. 71) from the balance sheet.

Three suppliers (11%) reported extraplain gains or losses from first-time consolidation of variable-interest entities. When consolidating a variable-interemainder entity for the first time, under FASB Interpretation no. 46R, one need to document an extraplain loss, in lieu of goodwill, if the entity is not characterized as a company. Similar to typical consolidations under Statement no. 141, providers incurring negative goodwill on a first-time consolidation of a variable-interest entity will record an extraordinary gain.

One company reported an extraplain obtain on involuntary convariation of assets as a result of a fire (view Exhilittle bit 2). Two even more service providers had reported extraordinary items for involuntary convariation of assets as a result of hurricanes however consequently amended their revenue statements to account for this occasion as an unusual, but not extrasimple, item. Because hurricane losses do not generally accomplish the criteria of unexplained and also inconstant, suppliers have actually not reported these losses as extraordinary. Six hurricanes, not classified as extrasimple in 2004, would certainly show that hurricane losses perform not fulfill the criteria as unusual or inregular. (See AICPA Technical Practice Aid 5400.05.)


Disclocertain Example Extraordinary Item: Fire

On March 28, 2003, the Company kind of had actually an accidental fire at the Junction, Texas, plant. The Company was given permission to begin demolition and the restructure of a section of the production facility in April 2003. The initial restoration task, completed in May 2003, contained the reconstruct of one extrusion line that had actually been partially damaged, electrical system replacement and roof replacement. The reconstruct of the second extrusion line was completed in April 2004. The Junction plant is fully insured for fire damage and also organization interruption. Thturbulent December 31, 2004 and 2003, the Company type of had actually got $6.0 million and $5.4 million, respectively, in insurance proceeds regarded this incident.

Due to the Junction facility fire, gross assets were created dvery own by roughly $4.91 million, together with the linked accumulated depreciation on those assets in the amount of $3.96 million, bring about a net book worth decrease in assets of around $950,000. At December 31, 2004 and also 2003, roughly $6.4 million and $3.9 million, respectively, had been invested in recreating the Junction facility. Insurance proceeds got to reimburse prices incurred to rebuild the facility brought about gains of $173,536 and also $2,962,041 for the years ended December 31, 2004 and 2003, respectively. Furthermore, the Company type of videotaped $11,213 in service interruption insurance throughout 2004, consisting of $8,720 to relocation lost income and also $2,493 to cover fixed prices. Throughout 2003, the Company type of videotaped $1,366,682 in service interruptions insurance, including $1,125,372 to relocation shed earnings and also $241,310 to cover addressed expenses. At December 31, 2003, approximately $484,000 was consisted of in accounts receivable for expected insurance reimbursements.

See more: Which One Of The Following Problems May Result From A Direct Democracy?

The continuing to be three items include: write-up of a regulatory ascollection, a change in a retirement fund, and also receipt of escrow moneys from bankruptcy. Two various other carriers that had initially reported extraplain items (one for reverse merger and also one for litigation) later amended their earnings statements to readjust this classification.

IS IT EXTRAORDINARY? In evaluating whether an occasion or transaction is extraplain, CPAs have to look to the guidance of criteria outlined in this short article and widespread exercise. Our survey of widespread exercise indicates that few gains and losses on at an early stage extinguishment of debt meet the criteria of being unusual and also inconstant. In addition, many hurricane and also fire damage is not reported as extraordinary. This leaves few transactions that are sufficiently unexplained and also inregular to sign up with one of accounting’s the majority of exclusive clubs.



CPExpress Income Statement Presentation: Sepaprice Line Item Reporting Requirements, by Bruce Brankid and Jon Bartley (# HKM).

Financial Statement and Accounting Policy Disclosure Issues (# FTC).

For even more information or to make a purchase, go to or speak to the Institute at 888-777-7077.