Reporting
Gains and Losses from Extinguishment of Debt
FAS
No. 4
(superceded
by
FAS
No.145)
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Problem
--
APB No. 30 and subsequent interpretations
precluded classifying most if
not all gains and losses from early
extinguishment of debt as an
extraordinary
item on the income statement. |
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Standards:
Income Statement
Presentation --
Gains and
losses from extinguishment of debt shall be
aggregated and if material,
classified as an extraordinary item, net of
related income tax effect.
Does not apply if
debt was
acquired to satisfy
sinking fund requirements. These gains
and losses shall be
aggregated
and the amount identified as a separate item.
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Disclosure
-- The following information shall be disclosed: |
|
a) |
Description
of
the extinguishment
transactions, including sources of funds used to
extinguish debt, if
practicable
to identify the sources. |
|
b) |
Income tax effect
in the
period of extinguishment. |
|
c) |
The per share
amount of the
aggregate gain
or loss, net of related income tax effect. |
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Limitation
on the
Extent APB No. 30 is amended --
This
statement amends APB No. 30
only to
the extent that classification of gains
and losses from
extinguishment
of debt shall be made without reference to the
criteria in paragraph 30
of that Opinion.
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"SFAS 4, partly in response to
concerns that companies were retiring debt for
the sole purpose of
achieving
increases in net income, added that these
gains (and losses) should be
treated as extraordinary items. This clashes,
unfortunately, with the
definition
of extraordinary items as unusual and
infrequent."
--Hendricksen
and Van Breda,
Accounting
Theory,
5th edition
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Mr. Kirk's
dissention at the end
of FAS No. 4.
Mr. Kirk
dissents [to FASB
No. 4] because he believes that extinguishments
of debt are reportable transactions that seldom,
if ever, warrant
extraordinary
item treatment. In many cases,
extinguishments are neither
unusual
nor infrequent. In most cases, they are
certainly no more
extraordinary
than other unusual or infrequent gains and losses
for which APB Opinion
No. 30 prohibits extraordinary item
classification. That Opinion
sharply restricted—for good reasons—the types of
gains and losses that
may be identified as extraordinary items and
reported on a net-of-tax
basis,
and Mr. Kirk can see no inherent characteristic of
debt extinguishments
that justifies overriding the criteria in APB
Opinion No. 30. . .
. . In his view, accounting standards cannot
satisfy everyone's
perception
of economic reality, but they should at least be
logically consistent
in
their result. Mr. Kirk believes that this
Statement fails in that
regard and may well encourage piecemeal erosion of
APB Opinion No. 30
FASB
Statement No. 4
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