The Financial Accounting Standards Board (FASB) proposed new accounting guidance on Tuesday that would remove requirements for extraordinary items from US Generally Accepted Accounting Principles (GAAP), as well as to simplify the measurement of inventory.
The two projects are part of a new FASB initiative to make US accounting rules less complex. The FASB is adding narrow-scope projects to its agenda that were identified by stakeholders as areas where US GAAP could be simplified in a relatively short period of time.
The short-term projects included in the initiative are intended to improve or maintain the usefulness of the information reported to investors while reducing costs and complexity in financial reporting.
The first proposed Accounting Standards Update issued on Tuesday – Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items – seeks to take out the concept of extraordinary items from US accounting rules. Current US GAAP calls for organizations to evaluate whether an event or transaction is an extraordinary item and, if it is deemed so, to separately present and disclose the item. However, stakeholders said the concept of extraordinary items causes uncertainty because it is unclear when an item should be considered both unusual and infrequent.
Under US GAAP, tragedies, such as the September 11 terrorist attacks and Hurricane Katrina, did not meet the definition of an extraordinary event. In late September 2001, the FASB Emerging Issues Task Force (EITF) said that “while the events of September 11 were certainly extraordinary, the financial reporting treatment that uses that label would not be an effective way to communicate the financial effects of those events and should not be used in this case.”
The task force added that because the economic effects of the terrorist attacks were so extensive and pervasive, it would be impossible to capture them in any one financial statement line item.
“Any approach to extraordinary item accounting would include only a part, perhaps a relatively small part, of the real effect,” the EITF said at the time. “Readers of financial reports will be intensely interested in understanding the whole impact of the events on each company.”
With Hurricane Katrina, the FASB noted in September 2005 that as tragic as hurricanes and other natural disasters are for those affected, “unfortunately every year many businesses across the country are affected by these types of events and thus they do not represent an unusual and infrequent occurrence to businesses or to insurers.”
The Mount St. Helens eruption in 1980 did meet the extraordinary item criteria because the Washington volcano hadn't erupted in 130 years. Weyerhauser Co. was able to report a $36 million loss of timber, logs, and building equipment as extraordinary in that case.
FASB officials said on Tuesday that eliminating the concept of extraordinary items would save time and reduce costs for preparers who would not assess whether a particular event or transaction is extraordinary. The proposal also is intended to alleviate uncertainty for preparers, auditors, and regulators because auditors and regulators no longer would evaluate whether a preparer presented an unusual and/or infrequent item appropriately.
The second proposed Accounting Standards Update – Inventory (Topic 330): Simplifying the Measurement of Inventory – addresses stakeholder concerns about the complexity of current US GAAP guidance on measuring inventory. Under current accounting rules, reporting organizations are required to measure inventory at the lower of cost or market. Market could be net realizable value, replacement cost, or net realizable value less a normal profit margin when measuring inventory.
The FASB’s proposal would direct reporting organizations to measure inventory at the lower of cost and net realizable value and thus would eliminate existing requirements to consider the replacement cost of inventory and the net realizable value of inventory less an approximately normal profit margin.
The FASB expects that both of the proposed accounting updates would be applied prospectively in annual periods, as well as interim periods within those annual periods, beginning after December 15, 2015. Early adoption would be permitted.
Stakeholders can provide comments on the proposed guidance for inventory measurement and extraordinary items by September 30, 2014. Those interested in commenting on the proposals can use the electronic feedback form on the FASB website.