It was back in 1992 when David Tweedie famously declared that extraordinary items in company accounts should become as rare as “Martians walking through the streets.” As the chairman of the Accounting Standards Board in the U.K. at the time — he’s now chairman of the International Accounting Standards Board (IASB) — Tweedie was voicing a view shared in the wider business community that the use of extraordinary items allowed companies to fudge their financial figures.
Above the Line
Almost 10 years later the debate is still raging, particularly in the wake of the September 11 terrorist attacks in the United States. Finance managers at many American companies felt that the costs and loss of earnings that resulted from those attacks could only be seen as extraordinary.
The Financial Accounting Standards Board (FASB), which sets U.S. GAAP, thinks otherwise. In a surprise ruling on September 28 (see “Losses from Terrorism Not ‘Extraordinary,’ Concludes FASB“), the board’s Emerging Issues Task Force (EITF) concluded that any losses sustained by companies as a result of the events of September 11 should be classified as part of ordinary activities, and should not be reported as extraordinary items. In other words, companies cannot record such losses below operating income on the P&L statement.
The EITF ruled that companies should report “unusually or infrequently occurring” costs related to the attacks as a separate item above the operating income line, explaining them in footnotes, or in management’s discussion of operations.
Commenting on the ruling, EITF chairman Tim Lucas explained that in the context of an already weakening economy, it would be too difficult a task for companies to set down the direct economic effects of the attacks in their statements. “No single line item can capture all of these effects,” he said.
Observers note that the ruling also avoids the risk that companies might be tempted to put unrelated costs into an extraordinary item, thus plumping up their underlying income.
Authorities in other jurisdictions have given FASB’s decision a nod of approval. The Urgent Issues Task Force of the Accounting Standards Board in the U.K. released a statement on October 18 that echoed FASB’s ruling, indicating that losses sustained by companies using its reporting standards should be classified as part of “ordinary activities.”
A spokesperson for the International Accounting Standards Board, meanwhile, described the decision from FASB as “eminently reasonable.” The spokesperson added that the IASB had not been asked to issue any official guidance on the matter.
There is no doubt that FASB’s decision has added momentum to the drive by international standard-setters to scrap the classification of extraordinary items altogether. According to Tony Wedgwood, a technical partner at KPMG in London, the term has since been all but eliminated in U.K. GAAP, and now exists “only as a theoretically possible classification.”
In the United States, too, the term has become increasingly rare. In its most recent annual survey of accounts published by U.S. companies, the AICPA, America’s association for chartered accountants, found that just 62 of 660 companies reported extraordinary items in the 1999 financial year.
As the IASB continues to promote convergence on a single set of enforceable global accounting standards, it is looking ever more unlikely that extraordinary items will be a part of them. “A few years ago there would have been little hesitation in classifying events like September 11 as extraordinary,” says Ken Wild, a technical partner at Deloitte & Touche in London. “It just goes to show that the world has changed.”
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