Accounting for Irregular Items
Change in estimate
Normal & recurring for correction
and adjustment
Unusual gain or loss
Material; typically from operating
activities; unusual or infrequent (but
not both)
Discontinued operations
Disposal of a segment of a business
constituting a separate line of business
or class of customer
Shown only in the individual account
line item affected on a before tax basis.
Shown (before tax) in a separate section
of the income statement above
extraordinary items. May be in the
“Other Rev/Gain/Exp/Loss” section.
Shown net of tax in a separate section
of the income statement after
continuing operations but before
extraordinary items
Extraordinary item
Shown net of tax in a separate section
Material; both unusual and infrequent of the income statement after
(nonrecurring)
discontinued operations.
Change in accounting principle
Change from one generally accepted
principle to another.
The cumulative effect of the change is
shown net of tax after extraordinary
items & BEFORE net income. Restate.
Intraperiod Tax Allocation
• The concept: items are presented on financial statements
with their related tax effects attached to them.
• Tax expense is allocated within the period to the items
that helped give rise to it.
After Tax Benefit =
(1- TaxRate) * (TaxableCashReceipt)
After Tax Cost =
= (1-TaxRate) * (TaxDeductibleCashOutflow)
=
Irregular Items
Discontinued Operations
Occurs when an entity discontinues clearly separable
operations, not just a disposal of assets incident to
operations.
May consist of:
(a) income (loss) from operations during the phase-out
period (the period between the “measurement date” & the
“disposal date”), &
(b) gain (loss) from disposal of segment assets
– You must define the segment, assets, method of disposal, time
periods involved, estimates of income between dates available,
estimated salvage value of assets, etc.
– Measurement Date is the Date the contract is signed.
– Disposal Date is the Date operations close and assets sold.
Extraordinary as defined in APB # 30
Irregular Items
IS NOT:
– write-down of receivables, inventory, deferred R&D
costs or other intangible
– from foreign currency translation
– disposal of a segment
– abandonment of facilities
– effects from strikes
– an adjustment of accruals of long-term contracts
IS:
– from early extinguishment of debt
– expropriation by a foreign government
– prohibition under a newly enacted law or regulation
Change in Accounting Principle
Irregular Items
Criteria:
Change from one generally accepted principle to
another.
Financial Statement Treatment:
• The cumulative effect of the change is shown net
of tax after extraordinary items but before net
income.
• All prior periods shown are restated. For periods
not presented that are affected by the change, the
beginning balance of retained earnings is also
restated.
Irregular Items
Prior Period Adjustments: FASB #16
Adjust the beginning balance of
Retained Earnings rather than have the
item reflected on the income statement
of any period (unless comparative
statements are presented).
– Prior Period Adjustments are:
• The correction of errors (mistakes, omissions)
• To account for the effect of operating loss tax
carryforwards of purchased subsidiaries.
• Reported net-of-tax.