Extraordinary Items
Summary of APB Opinion No. 9
17
 

 

 The Board concluded that net income should reflect all items of profit and loss recognized during the period with the sole exception of prior period adjustments. 

Extraordinary items should, however, be segregated from the results of ordinary operations and shown separately in the income statement, with disclosure of the nature and amounts thereof. 
18

 

 Prior period adjustments, those rare items which related directly to the operations of a specific prior period or periods, should, in single period statements, be reflected as adjustments of the opening balance of retained earnings. 
19

       

Advantages to above format: 
* inclusion of all operating items related to the current period, with segregation and disclosure of the extraordinary items
* a reporting of current income from operations free from distortions resulting from material items directly related to prior periods
*

proper retroactive reflection in comparative financial statements of material adjustments relating directly to prior periods
20 Income statement presentation

Income before extraordinary items $XXXX

Extraordinary items, less applicable income taxes XXXX

Net income $XXXX

 
 
 
 
 

 
If few in number, the individual extraordinary items can be presented directly on the face of the income statement; if numerous, the items can be summarized in a footnote and the net effect carried to the income statement as one item total.

If no extraordinary items, the term Net Income should replace the above captions.

The amount of income tax applicable to the extraordinary items should be disclosed on the face of the income statement or in a note thereto.
21 
 
 
 
 
 

 

 Criteria for Extraordinary Items Related to the Current Period 

Identifying extraordinary items requires the exercise of judgment.

Extraordinary items are identified primarily by the nature of the underlying occurrence.

They will be of a character significantly different from the typical or customary business activities of the entity.

Accordingly, they will be events and transactions of material effects which would not be expected to recur frequently and which would not be considered as recurring factors in any evaluation of the ordinary operating processes of the business.

Examples: (assuming they meet the above criteria)

Material gains and losses or provisions for losses from:

(a) the sale or abandonment of a plant or a significant segment of the business.

(b) the sale of an investment not acquired for resale.

(c) the write-off of goodwill due to unusual events or developments wihtin the period.

(d) the condemnation or expropriation of properties.

(e) a major devaluation of a foreign currency.
22 Certain gains or losses, regardless of size, do not constitute extraordinary items because they are of a character typical of the customary business activities of the entity. 

Examples:

(a) write-downs of receivables, inventories and research and development costs

(b) adjustments of accrued contract prices

(c) gains or losses from fluctuations of foreign exchange

The effects of items of this nature should be reflected in the determination of income before extraordinary items. If such effects are material, disclosure is recommended.
This summary does not substitute for reading the original pronouncement!
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