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on the Income Statement What are the ramifications of how and where extraordinary events are reported?

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Define " extraordinary items " and how to treat them in the financial statements according to "GAAP" and "IFRS"?

AccountingCost AccountingFinancial ReportingIFRSGAAP

Question added by Shady Ali - CMA , Senior Accountant , Smart Code for business services
Date Posted: 2016/08/18

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Answer added by Muhammad Waleed, Assistant Manager Finance , Turnotech (Private) Limited
3 years ago

Extraordinary items means an event which occurs and effects our business in financial terms but that event is very rare and does not related to our normal business activities or is normally not expected to occur and effect our business.

for example loss of inventory/merchandise stored in the godown due to fire or due to collapse of godown due to earthquake.

It is an old concept under GAAP and it has not been defined under IFRS.

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Answer added by haitham mohamed safan, internal auditor , الاومير للتجارة و المقاولات
3 years ago

…See moreTo classify the items to extraordinary should have infrequent and un usually . In gaap it is showen below the income statements but in ifrs not acceptable .

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Answer added by Tomasz L, Reporting Specialist , Outworking
3 years ago

I agree with following answers. "Extraordinary items" (gains or losses) are the financial results of random events that occur unexpectedly and outside the usual activities of the entity. Do not confuse them with the losses and gains in P&L as a result of the unit for the reporting period.

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Answer added by SHAHZAD Yaqoob, SENIOR ACCOUNTANT , ABDULLAH H AL SHUWAYER
3 years ago

…See moreExtraordinary Items Overview of Extraordinary Items An extraordinary item in accounting is an event or transaction that is considered abnormal, not related to ordinary company activities, and unlikely to recur in the foreseeable future. The formal use of extraordinary items has recently been eliminated under Generally Accepted Accounting Principles (GAAP), so the following discussion should be considered historical in natureThe reporting of an extraordinary item used to be an extremely rare event. In nearly all cases, an event or transaction was considered to be part of the normal operating activities of a business, and so was reported as such. Thus, a business might never report an extraordinary item. GAAP specifically stated that write-offs, write-downs, gains, or losses on the following items were not to be treated as extraordinary items: Abandonment of property Accruals on long-term contracts Disposal of a component of an entity Effects of a strike Equipment leased to others Foreign currency exchange Foreign currency translation Intangible assets Inventories Receivables Sale of property Examples of items that could be classified as extraordinary were the destruction of facilities by an earthquake, or the destruction of a vineyard by a hailstorm in a region where hailstorm damage was rare. Conversely, an example of an item that did not qualify as extraordinary was weather-related crop damage in a region where such crop damage was relatively frequent. The intent behind reporting extraordinary items within separate line items in the income statement was to clarify for the reader which items were totally unrelated to the operational and financial results of a business. International Financial Reporting Standards ( IFRS ) do not use the concept of an extraordinary item at all. Disclosure of Extraordinary Items An extraordinary item used to be separately stated in the income statement if it met any of the following criteria: It was material in relation to income before extraordinary items It was material to the trend of annual earnings before extraordinary items It was material by other criteria Extraordinary items were presented separately, and after the results of ordinary operations in the income statement, along with disclosure of the nature of the items, and net of related income taxes. If extraordinary items were reported on the income statement, then earnings per share information for the extraordinary items were to be presented either in the income statement or in the accompanying notes.

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Answer added by Deleted user
3 years ago

GAAP (Generally Accepted Accounting Principles) started from 1930 after crash of Stock market of 1929. An American Institute of Accountants’ special committee, in correspondence with the New York Stock Exchange, recommends five ‘broad principles of accounting which have won fairly general acceptance’ and introduces the passage ‘(the financial statements) fairly present, in accordance with accepted principles of accounting consistently maintained’ in the auditor’s report. These five ‘broad principles,’ plus a sixth, are approved by the Institute’s membership. The purpose is to improve accounting practice.

GAAP is based on established concepts, objectives, standards and conventions that have evolved over time to guide how financial statements are prepared and presented. GAAP is set with the objective of providing information that is useful to investors, lenders, or others that provide or may potentially provide resources to a company or not-for-profit organization.

GAAP includes principles on:

§  Recognition—what items should be recognized in the financial statements (for example as assets, liabilities, revenues, and expenses)

§  Measurement—what amounts should be reported for each of the elements included in financial statements,

§  Presentation – what line items, subtotals and totals should be displayed in the financial statements and how might items be aggregated within the financial statements

§  Disclosure—what specific information is most important to the users of the financial statements. Disclosures both supplement and explain amounts in the statements.

IFRS (International Financial Reporting Standards) foundation was established in 2001 in order to develop a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles and Paul Valcker appointed as a chairman. IFRS originated in the European Union, with the intention of making business affairs and accounts accessible across the continent. IFRS cover a wide range of accounting activities.

§  Statement of Financial Position: This is also known as a balance sheet. IFRS influence the ways in which the components of a balance sheet are reported.

§  Statement of Comprehensive Income: This can take the form of one statement, or it can be separated into a profit and loss statement and a statement of other income, including property and equipment.

§  Statement of Changes in Equity: Also known as a statement of retained earnings, this documents the company's change in earnings or profit for the given financial period.

§  Statement of Cash Flow: This report summarizes the company's financial transactions in the given period, separating cash flow into Operations, Investing, and Financing.

Differences between IFRS and U.S. GAAP

Consolidation — IFRS favors a control model whereas U.S. GAAP prefers a risks-and-rewards model. Some entities consolidated in accordance with FIN 46(R) may have to be shown separately under IFRS.

Statement of Income — Under IFRS, extraordinary items are not segregated in the income statement, while, under US GAAP, they are shown below the net income.

Inventory — Under IFRS, LIFO (a historical method of recording the value of inventory, a firm records the last units purchased as the first units sold) cannot be used while under U.S. GAAP, companies have the choice between LIFO and FIFO (is a common method for recording the value of inventory).

Earning-per-Share — Under IFRS, the earning-per-share calculation does not average the individual interim period calculations, whereas under U.S. GAAP the computation averages the individual interim period incremental shares.

Development costs — These costs can be capitalized under IFRS if certain criteria are met, while it is considered as “expenses” under U.S. GAAP.

Extraordinary Items is a line item on an income statement of a company prepared under US GAAP below Income from Discontinued Operations. It represents net of tax amounts related to unusual and infrequent events. Items are unusual in the context of a company's business and its environment. Items are infrequent if they are not reasonably expected to reoccur in the near future. An event needs to be both unusual and infrequent in order to qualify as an extraordinary item

Few examples of extraordinary items are:

•A loss due to seizure of property by government is an extraordinary item because it is unusual and infrequent in a democracy.

•Destruction of facilities by an earthquake, or the destruction of a vineyard by a hailstorm in a region where hailstorm damage was rare

•Loss of inventory/merchandise stored in the godown due to fire or due to collapse of godown due to earthquake

Gains and losses from extraordinary events are reported in a separate part of the income statement, after income from both continuing and discontinued operations. Unlike regular income, extraordinary items are reported net of tax effect, meaning that losses (gains) are reduced by related tax benefits (costs). In addition, losses should be reported net of any related insurance reimbursements. Transactions that could be considered unusual or infrequent, but not both, can be reported separately along with revenues and expenses from continuing operations. They should not be shown net of any tax effects.