FASB, in its subtopic 225-20, defines extraordinary as unusual and infrequent events. The underlying transaction must have a high degree of abnormality and must not be related to any ordinary or typical activities of the entity (Fasb.org). Secondly, the event must be infrequent, that is, an event that would not be reasonably expected to recur in the foreseeable future. FASB required that if an event meets the two condition, it should be reported as an extraordinary item. Thus, an entity should separate the income or loss from extraordinary items from those incomes and losses from ordinary operations of the entity (Kimmel, Weygandt and Kieso 697).
Extraordinary items were to be disclosed in the income statement if they are material in relation to income, earnings per share, annual earnings per share and by other criteria. Entities were required to disclose the income or loss related to the extraordinary item and the applicable income taxes to the extraordinary income. Besides, the entity had to disclose or present earnings per share information related to the extraordinary income. This information must be included in the income statement and or in the notes to the financial statements.
FASB has since updated the standard on extraordinary items. On January 9, 2015, FASB eliminated the concept of extraordinary items through the Accounting Standards Update No. 2015-01, simplified the presentation of income statements by eliminating extraordinary items (Fasb.org). FASB noted that the standard that requires the disclosure of extraordinary items needed change since it was rare for extraordinary items to occur. Businesses and auditors had to spend a lot of time evaluating if events met the criteria for classification as extraordinary items. According to FASB, the standards for consideration of an event as an extraordinary item were so high that only a few businesses reported extraordinary items. The research staff of the Board found that there were only 30 cases where extraordinary items were reported in the last five years. The effective date of the amendment is 15th December 2015 (Fasb.org).
Earthquake damage costs meet the conditions for classification as extraordinary items. An earthquake is an unusual event since it does not relate to the ordinary operations of the business. Besides, it is infrequent because we don’t expect to recur in every fiscal year. Therefore, it should be reported separately in the income statement for the fiscal year ended 1990 (Kimmel, Weygandt and Kieso 697). The presentation should include the total cost of the damage before tax ($27.5 million). All incomes and the total income from ordinary operations will be shown in the statement of operations. The loss resulting from the earthquake will be indicated on the income statement just below the total income from ordinary operations. This amount will not only be shown on the income statement but also included in the notes to the statement. A mere disclosure of the loss will not be adequate. This is because the amount in question is material. The loss net of tax benefits is more than the net income from ordinary operations hence the amount is material. Besides, the applicable income tax should be included in the disclosure. A loss of $16.5 million after tax benefits is so significant that it will have a substantial impact on the firm’s earnings per share. The company must also present and disclose the earnings per share data related to the extraordinary income. This treatment applies for the fiscal year 1990 sine the update to the standard is only applicable for periods after December 15, 2015 (Fasb.org).
Works cited
"Update No. 2015-01-Income Statement -”Extraordinary And Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation By Eliminating The Concept Of Extraordinary Items". Fasb.org. N.p., 2016. Web. 16 Mar. 2016.
Kimmel, Paul D, Jerry J Weygandt, and Donald E Kieso. Financial Accounting. Hoboken, N.J.: John Wiley & Sons, 2010. Print.
