Have you ever had a unique, one-time transaction and wondered how it should be accounted for in your financial statements? Previously, U.S. GAAP included the concept of extraordinary items. However, this was eliminated as the FASB wanted to reduce the cost and complexity of preparing financial statements. With this elimination, the FASB kept a requirement for you to disclose infrequent and unusual events.
So, what qualifies an event as infrequent or unusual? An infrequent event is something that you would not expect to happen again in the foreseeable future. An unusual item or event is something that is not normal and does not relate to the ordinary and typical activities of your business. Losses or slowdown of operations due to natural disasters, gains or losses from sales of long-term assets, losses from early retirement of debt, gains or losses from lawsuits, restructuring costs, plant shutdown costs, and costs associated with acquiring another business are examples of unusual or infrequent items.
Prior to the change in the accounting standards, it took a lot of effort to determine if an item or event qualified as extraordinary (sometimes at a disagreement with the company’s auditors). Furthermore, extraordinary items had to be shown separately on the income statement after continuing operations. You were also required to evaluate the income tax effect of the extraordinary items to present the extraordinary item net of its tax effect.
Under the current guidance, infrequent and unusual events must be presented as a separate component of continuing operations but you do not need to present them net of the income tax effect. The nature and financial effects of infrequent or unusual events must either be included in the income statement or, alternatively, disclosed in the notes to the financial statements. Below is an example of a loss from early retirement of a bond as an infrequent item (highlighted) as a separate line item on the income statement. Note how it is not reported as an extraordinary item after continuing operations.
If the presentation on the income statement does not include enough information related to the nature and financial effects of the transaction, you would consider adding additional disclosures in the financial statements to discuss the transaction that was unusual or infrequent. In many situations, this would happen automatically with updating disclosures from a prior year for many items that are required to be disclosed. Even if the presentation in the financial statements satisfies the requirements, your company may also want to provide further disclosures to elaborate on the event to better inform the users of the financial statements.
If you have any questions about what constitutes an unusual item or event, please contact your Henry+Horne advisor.
Davis Smith, CPA