An Extraordinary Change with Less Than Ordinary Impacts

By: Shelby Mann and Geoff Knobloch

The concept of extraordinary items dates back to the early 1900's. Over the years, the standards have become increasingly stringent with fewer transactions meeting criteria for recognition. In 1966, extraordinary items were included as a separate line item on the income statement, but there was little guidance for determining whether or not specific items qualified. The "unusual in nature and infrequent in occurrence" requirement was then added in 1973. Current guidance maintains the unusual and infrequent criteria, however reporting an extraordinary item has itself become an unusual and infrequent practice.

A gain or loss from extinguishment of debt was specifically listed as an extraordinary item starting in 1975, but was later rescinded in 2002. In addition, under previous standards, catastrophic events, such as the eruption of Mount St. Helens in 1980, were considered extraordinary. More recently, events such as 9/11 and Hurricane Katrina were disallowed as extraordinary, highlighting the rarity in which the standards for extraordinary items would apply.

On January 9, 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The main provision of ASU 2015-01 is the elimination of the concept of extraordinary items. This update is part of the FASB Simplification Initiative aimed at reducing the cost and complexity of accounting standards and further aligns U.S. accounting standards with international accounting standards. Eliminating the concept of extraordinary items reduces costs for preparers, auditors and regulators as they will no longer be required to assess whether an event should be classified as extraordinary.

ASU 2015-01 is effective for fiscal years beginning after December 15, 2015, for both public and private entities. Early adoption of the standard is permitted, as long as it is applied from the beginning of the fiscal year of adoption. Entities have a choice to apply the standard prospectively or retroactively for prior period presentations. The only required transitional disclosure will be to disclose the nature and the amount of an item included in income from continuing operations after adoption that adjusts an extraordinary item previously classified and presented as extraordinary before the date of adoption. As can be predicted, impacts as a result of the adoption of ASU 2015-01 are not expected to be "extraordinary."