Question

The FASB has recently taken the position that the reporting of extraordinary items is not substantially useful to financial statement readers and as such, this practice will be discontinued. What are your thoughts on us no longer reporting extraordinary items under U.S. GAAP? Is this an improvement? Why or why not?

Answer 1

Extraordinary items in financial statements means those items which are included in the financial statements but are not related to ordinary business activities, abnormal activities and unlikely to reoccur in the future.

Previously, Extraordinary items were requird to be seperately shown in the reporting along with their tax consequenses and their effect on the EPS. Now, this requirement has been eliminated.

This is an improvement in the GAAP. Following are the relevant points :

1. US GAAP specifically states that write off, gain and losses of the following items are not extraordinary items :

- Accurals on long term contracts

- Equipment leased to others.

- Inventroies

- Intangible assets

- Foreign Currency Exchange

So, Basically all the important items were not covered in extraordinary items. Hence, elimation of extra ordinary items will not affect the quality of the reporting.

2. Though reporting of Extraordinary items have been eliminated but companies are still required to report them as infrequent and unusal events.

3. In case of earthquack, fire etc it used to be difficult for the compnies to compute the exact losses. and their effect on tax.

4. So, it can be said that even after elimination of reporting of extra ordinary items . the reporting quality is being intact.

5. Further, IFRS does not have any such requirements.