Why do the following hold: 1. Unusual/Infrequent Items - reported before tax 2. Extraordinary and Discontinued Items - reported after tax. Why the difference in tax reporting methods?
Extraordinary are suppose to be due to circumstances beyond the companies control. Therefore the IRS is a bit easier on them. (A flood in Iowa, Earthquake in Wisconsin, etc). Unusual and infrequent. This is riddled with accounting irregularities though. (Cookie jar, big bath, etc) Discontinued items is the same type of deal. A identifiable portion of a company will no longer be in production, so the losses/gains incurred do not effect the taxes the company pays or saves. Unusual or infrequent items is just bad luck that the company.
yea, i guess that makes sense. thanks. So I can think of it this way: Unusal - bad luck - pay full taxes on this. Extraordinary - Government forgives the tax Discontinued - Government forgives the tax
Right. However I hope someone sheds more light.
With this stuff it’s best to just go over your notes and take questions on it. Every circumstance is different. Remember it has to be both unusual AND infrequent to be an extraordinary item.
Unusual or Infrequent Items: Restructuring costs including costs associated with severing employees and closing or reorganizing business operations. Asset impairment charges including the write-down or write-off of assets Gains or Losses on the disposal of a PORTION of a business component. Gains or losses on the sale of long-lived assets Extraordinary items: Losses associated with a foreign govt expropriation of assets and certain natural disasters (now if you live in Florida and you have constant hurricanes then that wouldn’t qualify as an extraordinary item because it’s not infrequent, or really unusual in nature) Also note that firms reporting under IFRS are prohibited from classifying any income statement items as “extraordinary Items” Discontinued Operations under both IFRS and US GAAP, when firms haev disposed of or established a plan to dispose of a “business component” with which they will have no further involvement, the effects of the disposal is reported under discontinued operations. Generally, a qualifying business component is defined as having separately identifiable operations and assets. Hope this helps
thanks everyone.
This paragraph makes no sense to me, anyone care to elaborate? My comments are in (bold):
IFRS require that items of income or expense that are material and/or relevant to the understanding of the entity’s financial performance should be disclosed separately. Unusual or infrequent items are likely to meet these criteria. ( Ok, so infrequent or unusual are presented separately on the IS under IFRS ) Under US GAAP, which allow items to be shown as extraordinary, items that are unusual or infrequent—but not both—cannot be shown as extraordinary. (So US GAAP has similar provision to IFRS i.e. that peculiar items should be disclosed however under US GAAP these items must both be unsuaul and infrequent - everything is clear so far) Items that are unusual or infrequent are shown as part of a company’s continuing operations. (I’m guessing this is referring to US GAAP only) For example, restructuring charges, such as costs to close plants and employee termination costs, are considered part of a company’s ordinary activities. (Fist bit I don’t understand - so under US GAAP these are part of ordinary, what about IFRS, these would qualify as unusual or infrequent?) As another example, gains and losses arising when a company sells an asset or part of a business, for more or less than its carrying value, are also disclosed separately on the income statement. (this sentence says “are also disclosed separately on the IS”, however the previous example talked about items that weren’t presented separately, so why also? Again, separately here under IFRS and US GAAP or IFRS only since US GAAP is more stringent?) These are not considered extraordinary under US GAAP because such sales are considered ordinary business activities. (This sentence says that these are NOT included on the IS where as the previous statement said they were, totally confused).
(Institute 181-182)
Institute, CFA. 2016 CFA Level I Volume 3 Financial Reporting and Analysis. CFA Institute, 07/2015. VitalBook file.
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