The Financial Accounting Standard Board (FASB) issued an Accounting Standard Update (ASU) that eliminated from generally accepted accounting principles (GAAP) the concept of extraordinary items as separate non-operating events.

GAAP currently requires all events to be evaluated for extraordinary item treatment. To be eligible for this classification, the event must not be normal to the entity’s current operations. This guidance requires these unusual events to meet both of the following criteria to be classified as an extraordinary item:

1.) Unusual in nature criteria, and

2.) Infrequency of occurrence criteria

Therefore events that are: 1.) highly abnormal and clearly unrelated to the entity’s typical activities, and 2.) reasonably expected not to recur in the foreseeable future, qualify for extraordinary item treatment. Although it is very rare to classify events as an extraordinary item, it still requires entities, auditors, regulators and others to spend time deliberating if the event meets the criteria for this special accounting treatment. When an event meets both the aforementioned criteria, the accounting treatment requires the entity to segregate the extraordinary item on its income statement after its results from ordinary income (loss) from continuing operations.

The elimination of extraordinary items from U.S. GAAP, ASU 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopics 225-20), will save entities time and reduce their cost associated with preparing its financial statements by no longer requiring the two prong extraordinary item criteria evaluation. Although this eliminates the requirements for reporting entities to assess events as extraordinary, the entity will still disclose similar information on the face of the income statement but now as a separate component of income from continuing operations, as opposed to after its income (loss) from continuing operations, or in notes to the financial statements.

Outlined below are effective dates and guidelines for implementing the new ASU:

  • Fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, including interim periods for the fiscal year.
  • Amendments may be retrospectively or prospectively applied to all applicable periods presented in the financial statement.
  • Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.

Need help solving the new guidance related to extraordinary items? Contact Doeren Mayhew’s accounting advisors in Florida, Michigan, North Carolina and Texas for assistance.

Sources: FASB.org