FASB Signals End of Extraordinary Items

by Edith Orenstein

The financial reporting concept of “extraordinary items” may be eliminated as part of the Financial Accounting Standards Board’s broader efforts to improve and simplify U.S. GAAP

Two previously little-noticed actions taken by the Financial Accounting Standards Board, being trumpeted as the launch of the board's Simplification Initiative, may have a significant impact on financial reporting.

At its May 28 meeting, FASB voted to add projects to its agenda to ‘simplify’ accounting for inventory by requiring it to be carried at the lower of cost or net realizable value.

Perhaps more significantly, FASB also voted to remove the extraordinary items concept from Generally Accepted Accounting Principles (GAAP).

My two cents – I view the potential removal of the 'extraordinary items' concept or category in the financial statements as something top management should be evaluating now. Once the removal of the extraordinary items category takes effect, it will move material transactions outside the normal course of business that a company would have previously considered for 'extraordinary item' treatment into other line items in the financial statements.

Significantly, each of these 'simplification' projects are described in FASB's June 10 announcements as 'short-term projects.’ Speaking at a conference at the University of Southern California’s Leventhal School of Accounting last week, FASB Vice Chairman Jim Kroeker said of these projects:

"[T]hese issues were added to our agenda and addressed by the board in a single public meeting." He added, "That puts us in a position to quickly issue Exposure Drafts and – fingers crossed – complete these projects in a matter of months. Think about the cumulative impact of a sustained effort to systematically and quickly attack these issues.”

Domestic Agenda Takes Precedence

In his USC remarks, Kroeker further noted that, "the FASB earlier this year began retooling our agenda to reflect the new era in which we’re operating," specifically, an era in which the major convergence projects with the International Accounting Standards Board (IASB) were coming to a close.

Reiterating major categories announced in previous speeches by FASB Chairman Russell Golden, Kroeker outlined the upcoming areas of focus for FASB as including:

  • Foundational or big picture projects, including the Conceptual Framework, and Disclosure Project (addressing Disclosure Effectiveness - the term used by the SEC for its related project)
  • Transparency-related projects, including focusing on recognition and measurement, disclosure-only, and interpretation
  • Complexity/simplification projects
FASB describes the dual goals of its simplification initiative as follows:

"The projects included in the [simplification] initiative are intended to improve or maintain the usefulness of the information reported to investors while reducing costs and complexity in financial reporting."

Kroeker appropriately references FASB and its staff "as the stewards of an ever-evolving set of accounting standards that collectively have been referred to as the 'gold standard' of financial reporting regimes."

The End of an Era: Whither IFRS?

Although the FASB-IASB convergence projects have largely come to an end (see list below), other issues identified in the SEC's 'work plan' to consider use of International Financial Accounting Standards (IFRS) by U.S. companies, as identified in the final SEC Staff Report on the issue, remained with some level of discomfort  or unresolved -- if not within the Commission, then in the larger realm such as the U.S. Congress, the International Organization of Securities Commissions and other stakeholders.

At the USC conference last week, for example, former U.S. Securities and Exchange Commission Chairman Christopher Cox shared what he views as the lessened possibilities for IFRS to be taken up as a 'global' standard.

Now that the final converged revenue recognition standard has been released by FASB and IASB, remaining convergence projects include the final joint standard on leases, credit impairment, and classification and measurement of financial instruments.

FASB’s Kroeker, in his remarks at the USC conference, made it clear FASB will still participate actively on IASB's Accounting Standards Advisory Forum to develop and promote the use of IFRS.

Additionally, Kroeker emphasized FASB will "further develo[p] and leverag[e] our relationships with other national standard setters, including those in North America, Europe, and Asia."

These remarks parallel the direction marked by FASB Chairman Russell Golden in remarks last fall at a meeting of FEI's Japan Chapter and Keidanren.

You can learn more about the joint Revenue Recognition Standard from a host of experts at FEI’s Revenue Recognition Conference June 16 in NYC.