1. Goodbye Extraordinary Items Presented at Mainline Association for Continuing Education at Great Valley, PA on March 19, 2015 by Joel Wagoner, CPA, CMA, CFM Assistant Professor DeSales University

2. Goodbye Extraordinary Items Accounting Standards Update (ASU) 2015-01 eliminates extraordinary items from Generally Accepted Accounting Principles (GAAP). This update amends Subtopic 225-20 of the Financial Accounting Standards Board (FASB) Codification Database.

3. Goodbye Extraordinary Items Why did the FASB decide to eliminate extraordinary items?

4. Goodbye Extraordinary Items The FASB is doing so as part of its “Simplification Initiative... to reduce complexity in accounting standards…to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements” (ASU 2015—1)

5. Goodbye Extraordinary Items Previously, an event that materially affected the financial statements that was characterized by its “unusual nature” and “infrequency of occurrence” was required to be segregated on the income statement.

6. Goodbye Extraordinary Items This classification created difficulties: Uncertainty on whether to classify; Rarity of events qualifying; Questionable necessity of classifying.

7. Goodbye Extraordinary Items The uncertainty and rarity are underscored by the fact that neither the terrorist attacks of September 11, 2001 nor Hurricane Katrina qualified as an extraordinary item.

8. Goodbye Extraordinary Items “Eliminating the concept of extraordinary items will save time and reduce costs for preparers because they will not have to assess whether a particular event or transaction event is extraordinary…auditors and regulators no longer will need to evaluate whether a preparer treated an unusual and/or infrequent item appropriately.” (ASU 2015-01)

9. Goodbye Extraordinary Items “Even though the conditions for presenting an extraordinary item are rarely met, preparers, auditors, and regulators often are required to spend time and expend resources deciding whether an unusual and/or infrequent event or transaction meets the conditions for extraordinary classification.” (ASU 2015-01)

10. Goodbye Extraordinary Items Some have argued for years that extraordinary items should be eliminated. (Massoud, Raiborn, and Humphrey, 2007.)

11. Goodbye Extraordinary Items Extraordinary items are not allowed under International Financial Reporting Standards (IFRS).

12. Goodbye Extraordinary Items Extraordinary items had been an area of abuse in years past. (e.g., reorganizations as extraordinary events.)

13. Goodbye Extraordinary Items With the Conceptual Framework’s emphasis shifting from “reliability” to “faithfully representing economic reality”, the metaprinciple necessitating separate reporting of extraordinary items was eliminated.

14. Goodbye Extraordinary Items Extraordinary items were not mentioned in either of the exposure drafts on the redesign of the financial statements issued by the FASB and International Accounting Standards Board (IASB) in 2008 and 2010.

15. Goodbye Extraordinary Items The overwhelming majority of extraordinary items reported in the 21 st Century have been for either (1) gains and losses on early extinguishment of debt; (2) “negative goodwill” on acquisitions (during the financial crisis of the last decade).

16. Goodbye Extraordinary Items A 2014 Exposure Draft proposing to eliminate extraordinary items received 36 comments. “Overall, respondents agreed that eliminating the extraordinary classification will simply income statement presentation…” (ASU 2015- 1)

17. Goodbye Extraordinary Items (Of the 36 comments, 11 were submitted by Accounting students, 11 by professional organizations, 10 by Accounting firms, 2 by industry trade groups, 1 by a preparer, and 1 by an individual.)

18. Goodbye Extraordinary Items ASU 2015-01 requires that gains and losses on the early extinguishment of debt be recognized as (non-extraordinary) gains.

19. Goodbye Extraordinary Items ASU 2015-01 does not preclude reporting unusual items as separate line items in the income statement. (What formerly were extraordinary items are now unusual items.)

20. Goodbye Extraordinary Items Previously, items would be reported separately – but not as extraordinary items – if they were unusual or infrequent, but not both.

21. Goodbye Extraordinary Items Such items will now be reported in continuing operations, and will not be presented net of tax.

22. Goodbye Extraordinary Items ASU 2015-1 willl also simplify the income statement in that calculations and presentation of intraperiod tax allocation and earnings per share will have one less item to present.

23. Goodbye Extraordinary Items ASU 2015-01 does not address negative goodwill. (Prior to 2007, asset values would have been written down to eliminate the effect of negative goodwill.)

24. Goodbye Extraordinary Items ASU 2015-1 allows for either a retrospective or prospective implementation.

25. Goodbye Extraordinary Items ASU 2015-1 is effective for financial statements prepared for fiscal year-ends after December 15, 2015.

26. Goodbye Extraordinary Items How did we come to report unusual and infrequent events as “extraordinary items”, and how did such reporting become obsolete?

27. Goodbye Extraordinary Items Massoud, Raiborn, and Humphrey cite a 1917 pamphlet, prepared by the AICPA and published by the Federal Reserve Bank entitled “Uniform Accounting” and republished in 1918 as “Approved Methods for the Preparation of Balance Sheet Accounts”.

28. Goodbye Extraordinary Items The Federal Reserve Bank pamphlet recommends “an income statement that showed extraordinary gains and losses on its face after determination of net income for the period.” (Massoud, Raiborn, and Humphrey)

29. Goodbye Extraordinary Items “In the 1920s, however, extraordinary items were typically accounted for directly in the retained earnings (or surplus) account. Often there was little, if any, disclosure of what constituted an extraordinary item.” (Ibid.)

30. Goodbye Extraordinary Items After the SEC was formed in 1934, it “it agreed with the American Accounting Association and advocated the use of an all-inclusive income statement model rather than a current operating performance model. As such, extraordinary items would be shown on the income statement but separated from regular, recurring revenues, expenses, gains, and losses.” (ibid.)

31. Goodbye Extraordinary Items Accounting Research Bulletin (ARB) 8 (1941) and ARB 32 (1947) “took a modified all-inclusive approach, promulgating the income statement as the appropriate document in which to present the majority of financial transactions for the current period, with the exception of transactions with investors and material items that were clearly not identifiable with current business operating performance.” (ibid.)

32. Goodbye Extraordinary Items The Accounting Principles Board (APB) issued two statements that directly dealt with extraordinary items.

33. Goodbye Extraordinary Items “APB Opinion 9 (1966) stated that extraordinary items were events that differed significantly enough from an entity’s customary business activities as to make those events unlikely to often reoccur; however, Opinion 9 gave no explicit criteria for categorizing an item as extraordinary or ordinary.” (ibid.)

34. Goodbye Extraordinary Items APB Opinion 9, however, did give examples of events that would and would not be considered extraordinary items.

35. Goodbye Extraordinary Items APB Opinion 26 (1972) addressed gains and losses from the extinguishment of debt as being extraordinary items.

36. Goodbye Extraordinary Items “In Opinion 30 (1973), the APB noted that recent financial reporting practices indicated that companies were having difficulty interpreting Opinion 9 criteria for extraordinary items, resulting in a variety of ideas about what was and was not extraordinary.” (ibid.)

37. Goodbye Extraordinary Items “Thus, Opinion 30 provided more-specific criteria for determining extraordinary items. The guidance stated that, for an event or transaction to be classified as extraordinary, it had to be both unusual in nature (abnormal) and infrequent in occurrence (not reasonably expected to recur in the foreseeable future). (ibid.)

38. Goodbye Extraordinary Items The FASB’s Statement of Accounting Standards (SFAS) 4 (1975) “stated that any gain or loss from the extinguishment of debt, regardless of whether that debt was extinguished before or on its maturity date, would be included on the income statement as an extraordinary item.” (ibid.)

39. Goodbye Extraordinary Items An exception to this was for bond retirements accomplished through sinking funds.

40. Goodbye Extraordinary Items SFAS 64 (1982) eliminated the exception of sinking funds, except when the sinking fund payments were within one year of the extinguishment date.

41. Goodbye Extraordinary Items SFAS 145 (2002) rescinded SFAS’s 4 and 64, and stated that early extinguishment of debt would qualify as an extraordinary item only if it met the “unusual and infrequent” creiteria.

42. Goodbye Extraordinary Items In 2002, there were 40 bond extinguishments reported as extraordinary items. In 2003, with the passage of SFAS 145, there were only four. (ibid.)

43. Goodbye Extraordinary Items In 2003, only two percent of companies presented extraordinary items on their income statements.

44. Goodbye Extraordinary Items The number of companies reporting extraordinary items saw an upsurge during the financial crisis of last decade, but by 2015, the consensus was that time had come to officially retire the concept.

45. Goodbye Extraordinary Items Sources: Accounting Standards Update 2015-01, Financial Accounting Standards Board (FASB), Norwalk, CT Extraordinary Items, Time to Eliminate the Classification; Massoud, Raiborn, and Humphrey, CPA Journal, 2007