Previous guidance allowed/required items to be classified as extraordinary when they were deemed both unusual and infrequent. Events or transactions meeting the criteria for classification as extraordinary were required to be segregated from the results of ordinary operations (Operational income or income from operations) and shown separately in the income statement, net of tax, after income from continuing operations. Extraordinary items Extraordinary items Extraordinary items
Disclosure of income taxes related to extraordinary items also was required. And entities were required to present or disclose earnings-per-share data applicable to extraordinary items.
It is extremely rare in current practice for a transaction or event to meet the requirements to be presented as an extraordinary item, but preparers nonetheless were spending time and incurring costs to assess whether events or transactions were extraordinary. From 2002 (IFRS) and 2015 (US GAAP) on, the need for those assessments to evaluate whether a preparer treated an unusual and/or infrequent item appropriately is eliminated. Extraordinary items Extraordinary items Extraordinary items
The elimination, for IFRS already made in 2002, makes sense because in running a business there are a few certainties, paying taxes and extraordinary items happening.
There are other ways to explain unusual and infrequent events or transactions. See for example the reporting by BP Plc of the Gulf of Mexico oil spill in the BP Annual Report and Form 20-F 2010 (complete report):
The effect of the Gulf of Mexico spill has been included in the regular reporting lines in group income statement. The effects on the income statement, balance sheet and cash flow statement have been quantified in Note 2 Significant event – Gulf of Mexico oil spill in the BP Annual Report and Form 20-F 2010 (most important pages only):
IAS 1 Presentation of Financial Statements in paragraph 87 states that an entity shall not present any items of income or expense as extraordinary items, in the statement of comprehensive income or the separate income statement (if presented), or in the notes.
Further, in the Basis for Conclusions (BC) on IAS 1 Presentation of Financial Statements, BC 60 states that IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies (issued in 1993) required extraordinary items to be disclosed in the income statement separately from the profit or loss from ordinary activities. That standard defined ‘extraordinary items’ as ‘income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and therefore are not expected to recur frequently or regularly’.
In 2002, the IASB decided to eliminate the concept of extraordinary items from IAS 8 and to prohibit the presentation of items of income and expense as ‘extraordinary items’ in the income statement and the notes. Therefore, in accordance with IAS 1, no items of income and expense are to be presented as arising from outside the entity’s ordinary activities.
Some respondents to the exposure draft of 2002 argued that extraordinary items should be presented in a separate component of the income statement because they are clearly distinct from all of the other items of income and expense, and because such presentation highlights to users of financial statements the items of income and expense to which the least attention should be given when predicting an entity’s future performance.
The Board (IASB) decided that items treated as extraordinary result from the normal business risks faced by an entity and do not warrant presentation in a separate component of the income statement. The nature or function of a transaction or other event, rather than its frequency, should determine its presentation within the income statement. Items currently classified as ‘extraordinary’ are only a subset of the items of income and expense that may warrant disclosure to assist users in predicting an entity’s future performance.
Eliminating the category of extraordinary items eliminates the need for arbitrary segregation of the effects of related external events-some recurring and others not-on the profit or loss of an entity for a period. For example, arbitrary allocations would have been necessary to estimate the financial effect of an earthquake on an entity’s profit or loss it it occurs during a major cyclical downturn in economic activity. In addition, paragraph 97 of IAS 1 requires disclosure of the nature and amount of material items of income and expense.
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