INTRODUCTION APB 9 STATUS. Issued: December Effective Date: For fiscal periods beginning after December 31, 1966

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1 APB 9: Reporting the Results of Operations I Net Income and the Treatment of Extraordinary Items and Prior Period Adjustments II Computation and Reporting of Earnings per Share APB 9 STATUS Issued: December 1966 Effective Date: For fiscal periods beginning after December 31, 1966 Affects: Deletes ARB 43, Chapter 2B and Chapter 8 Amends ARB 43, Chapter 5, paragraphs 5, 6, 8, and 9 and footnote 1 Amends ARB 43, Chapter 10A, paragraph 19 Amends ARB 43, Chapter 10B, paragraphs 15 and 17 Amends ARB 43, Chapter 11B, paragraph 9 and footnotes 3 and 4 Amends ARB 43, Chapter 12, paragraph 21 Amends ARB 43, Chapter 15, paragraphs 7 and 17 Supersedes ARB 49 Affected by: Paragraph 6 amended by APB 13, paragraph 2 Paragraph 17 amended by APB 30, paragraph 7, and FAS 111, paragraph 8(d) Paragraph 18 amended by FAS 16, paragraph 16(a) Paragraph 20 amended by APB 20, paragraph 5(b) Paragraphs 20 through 22 and 29, footnote 2, and Exhibits A through D deleted by APB 30, paragraph 7 Paragraphs 23 and 24 deleted by FAS 16, paragraph 16(a) Paragraph 25 deleted by APB 20, paragraph 5(c) Paragraphs 30 through 51, footnotes 6 through 9, and Exhibit E deleted by APB 15, paragraph 3 Other Interpretive Pronouncements: AIN-APB 9, Interpretations No. 1 and 2 (Interpretation No. 2 superseded by FAS 111) FTB 85-2 (Superseded by FAS 125) Issues Discussed by FASB Emerging Issues Task Force (EITF) Affects: No EITF Issues Interpreted by: No EITF Issues Related Issues: EITF Issues No and INTRODUCTION 1. The American Institute of Certified Public Accountants, through its boards and committees, reviews from time to time the form and content of financial statements to determine how their usefulness may be improved. This Opinion is the result of a review of present practice in the reporting of the results of operations of business entities. 2. This Opinion supersedes (a) Chapter 2B, Combined Statement of Income and Earned Surplus of

2 Accounting Research Bulletin No. 43; (b) Chapter 8, Income and Earned Surplus of Accounting Research Bulletin No. 43; and (c) Accounting Research Bulletin No. 49, Earnings per Share. It also modifies Chapter 5, Intangible Assets (paragraphs, 5, 6, 8, and 9); Chapter 10A, Real and Personal Property Taxes (paragraph 19); Chapter 10B, Income Taxes (paragraphs 15 and 17); Chapter 11B, Government Contracts Renegotiation (paragraph 9); Chapter 12, Foreign Operations and Foreign Exchange (paragraph 21); and Chapter 15, Unamortized Discount, Issue Cost, and Redemption Premium on Bonds Refunded (paragraphs 7 and 17) of Accounting Research Bulletin No. 43 to the extent the paragraphs indicated specify a particular treatment within income or retained earnings. 3. This Opinion (a) concludes that net income should reflect all items of profit and loss recognized during the period except for prior period adjustments, with extraordinary items to be shown separately as an element of net income of the period, (b) specifies the criteria to be used in determining which items, if any, recognized during the current period are to be considered extraordinary items, (c) specifies the criteria to be used in determining which items, if any, recognized during the current period are to be considered prior period adjustments and excluded from net income for the current period and (d) specifies the statement format and terminology to be used and the disclosures to be made when extraordinary items or prior period adjustments are present. 4. This Opinion also specifies the method of treating extraordinary items and prior period adjustments in comparative statements for two or more periods, specifies the disclosures required when previously issued statements of income are restated and recommends methods of presentation of historical, statistical-type financial summaries which include extraordinary items or are affected by prior period adjustments. In part II, this Opinion specifies how earnings per share and dividends per share should be computed and reported. 5. For convenience, the term net income is used herein to refer to either net income or net loss. Similarly, net income per share or earnings per share is used to refer to either net income (or earnings) per share or net loss per share. Applicability 6. This Opinion applies to general purpose statements which purport to present results of operations in conformity with generally accepted accounting principles. Investment companies, insurance companies and certain nonprofit organizations have developed income statements with formats different from those of the typical commercial entity described herein, designed to highlight the peculiar nature and sources of their income or operating results. The portion of this Opinion which requires that net income be presented as one amount does not apply to such entities. I Net Income and the Treatment of Extraordinary Items and Prior Period Adjustments DISCUSSION General 7. Business entities have developed a reporting pattern under which periodic financial statements are prepared from their accounting records to reflect the financial position of the entity at a particular date and the financial results of its activities for a specified period or periods. The statement of income and the statement of retained earnings (separately or combined) are designed to reflect, in a broad sense, the "results of operations." 8. A problem in reporting the results of operations of a business entity for one or more periods is the treatment of extraordinary items and prior period adjustments. This Opinion discusses the nature of events and transactions which might be considered "extraordinary," establishes related criteria which the Board feels are reasonable and practicable, and specifies the method and extent of disclosure of such items in the

3 financial statements. The Opinion also discusses the various types of adjustment which might be considered to be proper adjustments of the recorded results of operations of prior periods and establishes criteria which the Board feels are reasonable and practicable for the relatively few items which should be so recognized. Historical Background General 9. There is considerable diversity of views as to whether extraordinary items and prior period adjustments should enter into the determination of net income of the period in which they are recognized. When Accounting Research Bulletin No. 32 was issued in December 1947, as well as when it was reissued in June 1953 as Chapter 8 of Accounting Research Bulletin No. 43, two conflicting viewpoints had attracted considerable support. The paragraphs which follow summarize the discussion of these two viewpoints contained in Chapter 8. Current Operating Performance 10. Under one viewpoint, designated current operating performance, the principal emphasis is upon the ordinary, normal, recurring operations of the entity during the current period. If extraordinary or prior period transactions have occurred, their inclusion might impair the significance of net income to such an extent that misleading inferences might be drawn from the amount so designated. 11. Advocates of this position believe that users of financial statements attach a particular business significance to the statement of income and the "net income" reported therein. They point out that, while some users are able to analyze a statement of income and to eliminate from it those prior period adjustments and extraordinary items which may tend to impair its usefulness for their purposes, many users are not trained to do this. They believe that management (subject to the attestation of the independent auditors) is in a better position to do this, and to eliminate the effect of such items from the amount designated as net income. 12. Advocates of this position also point out that many companies, in order to give more useful information concerning their earnings performance, restate the earnings or losses of affected periods to reflect the proper allocation of prior period adjustments. They believe therefore that items of this type may best be handled as direct adjustments of retained earnings or as "special items" excluded from net income of the current period. They feel that extraordinary items of all types may often best be disclosed as direct adjustments of retained earnings, since this eliminates any distortive effect on reported earnings. All Inclusive 13. Under the other viewpoint, designated all inclusive, net income is presumed to include all transactions affecting the net increase or decrease in proprietorship equity during the current period, except dividend distributions and transactions of a capital nature. 14. Proponents of this position believe that the aggregate of such periodic net incomes, over the life of an enterprise, constitutes total net income, and that this is the only fair and complete method of reporting the results of operations of the entity. They believe that extraordinary items and prior period adjustments are part of the earnings history of an entity and that omission of such items from periodic statements of income increases the possibility that these items will be overlooked in a review of operating results for a period of years. They also stress the dangers of possible manipulation of annual earnings figures if such items may be omitted from the determination of net income. They believe that a statement of income including all such items is easy to understand and less subject to variations resulting from different judgments. They feel that, when judgment is allowed to determine whether to include or exclude particular items or adjustments, significant differences develop in the treatment of borderline cases and that there is a danger that the use of "extraordinary" as a criterion may be a means of equalizing income. Advocates of this theory believe that full disclosure in the income statement of the nature of any extraordinary items or prior period adjustments during each period will enable the user of a statement of income to make his own assessment of the importance of the items and their effects on operating results.

4 Decisions of Committee on Accounting Procedure Subsequent Developments 15. The committee on accounting procedure (predecessor of the Accounting Principles Board) did not embrace either of these viewpoints in its entirety in issuing its first Accounting Research Bulletin on this subject in December Instead, the committee stated "... it is the opinion of the committee that there should be a general presumption that all items of profit and loss recognized during the period are to be used in determining the figure reported as net income. The only possible exception to this presumption in any case would be with respect to items which in the aggregate are materially significant in relation to the company's net income and are clearly not identifiable with or do not result from the usual or typical business operations of the period. Thus, only extraordinary items such as the following may be excluded from the determination of net income for the year, and they should be excluded when their inclusion would impair the significance of net income so that misleading inferences might be drawn therefrom:...." i 1 The list of items which followed consisted of material charges or credits, other than ordinary adjustments of a recurring nature, (a) specifically related to operations of prior years, (b) resulting from unusual sales of assets not acquired for resale and not of the type in which the company usually deals, (c) resulting from losses of a type not usually insured against, (d) resulting from the write-off of a material amount of intangibles or a material amount of unamortized bond discount or premium and expense. The language quoted above was continued substantially unchanged in the 1953 Restatement and Revision of Accounting Research Bulletins, becoming Chapter 8 of ARB No Since the issuance of these guidelines for the determination of net income, developments in the business and investment environment have increased the emphasis on, and interest in, the financial reporting format of business entities and the nature of the amount shown as net income therein. As a result of the widespread and increasing dissemination of financial data, often in highly condensed form, to investors and potential investors, suggestions have been made that the criteria for the determination of the amount to be reported as net income, insofar as it is affected by extraordinary items and prior period adjustments, should be re-examined. OPINION Summary 17. The Board has considered various methods of reporting the effects of extraordinary events and transactions and of prior period adjustments which are recorded in the accounts during a particular accounting period. The Board has concluded that net income should reflect all items of profit and loss recognized during the period with the sole exception of the prior period adjustments. Extraordinary items should, however, be segregated from the results of ordinary operations and shown separately in the income statement, with disclosure of the nature and amounts thereof. 18. Those items that are reported as prior period adjustments shall, in single period statements, be reflected as adjustments of the opening balance of retained earnings. When comparative statements are presented, corresponding adjustments should be made of the amounts of net income (and the components thereof) and retained earnings balances (as well as of other affected balances) for all of the periods reported therein, to reflect the retroactive application of the prior period adjustments. (See paragraph 26 for required disclosures of prior period adjustments.) 19. The Board has concluded that the above approach to the reporting of the results of operations of business entities will result in the most meaningful and useful type of financial presentation. The principal advantages are: (a) inclusion of all operating items related to the current period, with segregation and disclosure of the extraordinary items, (b) a reporting of current income from operations free from distortions resulting from material items directly related to prior periods and (c) proper retroactive reflection in comparative financial statements of material adjustments relating directly to prior periods. In reaching its conclusion, the Board recognizes that this approach may involve (a) occasional revision of previously-reported net income for prior periods to reflect subsequently recorded material items directly related thereto, (b) difficulty in segregating extraordinary items and items related to prior periods and (c) the possibility that disclosures regarding adjustments of opening balances in retained earnings or of net income of prior periods will be overlooked by the reader.

5 [These paragraphs have been deleted. See Status page.] 2 [This footnote has been deleted. See Status page.] Disclosure of Prior Period Adjustments and Restatements of Reported Net Income 26. When prior period adjustments are recorded, the resulting effects (both gross and net of applicable income tax) on the net income of prior periods should be disclosed in the annual report for the year in which the adjustments are made. ii 3 When financial statements for a single period only are presented, this disclosure should indicate the effects of such restatement on the balance of retained earnings at the beginning of the period and on the net income of the immediately preceding period. When financial statements for more than one period are presented, which is ordinarily the preferable procedure, iii 4 the disclosure should include the effects for each of the periods included in the statements. Such disclosures should include the amounts of income tax applicable to the prior period adjustments. Disclosure of restatements in annual reports issued subsequent to the first such post-revision disclosure would ordinarily not be required. Historical Summaries of Financial Data 27. It has become customary for business entities to present historical, statistical-type summaries of financial data for a number of periods commonly five or ten years. The Board recommends that the format for reporting extraordinary items described in paragraph 20 be used in such summaries. The Board further recommends that, whenever prior period adjustments have been recorded during any of the periods included therein, the reported amounts of net income (and the components thereof), as well as other affected items, be appropriately restated, with disclosure in the first summary published after the adjustments. Capital Transactions 28. The Board reaffirms the conclusion of the former committee on accounting procedure that the following should be excluded from the determination of net income or the results of operations under all circumstances: (a) adjustments or charges or credits resulting from transactions in the company's own capital stock, iv 5 (b) transfers to and from accounts properly designated as appropriated retained earnings (such as general purpose contingency reserves or provisions for replacement costs of fixed assets) and (c) adjustments made pursuant to a quasi-reorganization [These paragraphs have been deleted. See Status page.] 6-9 [These footnotes have been deleted. See Status page.] EFFECTIVE DATE 52. This Opinion shall be effective for fiscal periods beginning after December 31, However, where feasible the Board recommends earlier compliance with this Opinion. The Board also strongly recommends that, in comparative statements in which one or more periods are subject to this Opinion, the provisions of the Opinion be applied to all periods appearing therein. The Opinion entitled "Reporting the Results of Operations" was adopted unanimously by the twenty members of the Board, of whom five, Messrs. Biegler, Catlett, Frese, Halvorson and Walker, assented with qualification. Mr. Biegler assents to the issuance of this Opinion because he believes that the usefulness of the income statement to the investor is enhanced when all items of profit and loss relating to the period are included in the determination of net income and the results of the ordinary, recurring operations of a business are reported separately from extraordinary items. He believes that the caption described in

6 paragraph 20 as "Income before extraordinary items" can best meet the needs of investors for an index of the results of and trends in ordinary recurring operations when there is excluded therefrom those gains or losses which are extraordinary because of the combination of rarity in the circumstances giving rise thereto and the abnormal size thereof. Accordingly, he dissents from the conclusion stated in paragraph 22 that certain types of gains or losses, regardless of size, must be reflected in the determination of "income before extraordinary items." He believes that the quality of being extraordinary can be derived from rarity or extreme infrequency in size, as well as from the nature of a transaction or event. Mr. Catlett does not agree that the criteria for prior period adjustments as set forth in paragraphs 23 and 24 of this Opinion are established on a proper basis. He considers that the nature of the adjustment and the factors which cause it are controlling, and that any material item which is in fact applicable to, and a correction of, a prior period should be accounted for as an adjustment of that period. He believes that there are cases in which prior period adjustments are appropriate with respect to questions involving realization of assets, such as receivables, inventories and property. He is of the opinion (1) that the Board is establishing arbitrary rules to discourage or prohibit prior period adjustments rather than determining appropriate principles to be followed in reviewing the nature of the items involved, and (2) that the inclusion in the current period's net income of a material item which is really applicable to a prior period results in the financial statements for two periods being in error. Mr. Walker, joined by Mr. Frese, recognizes that the Opinion attempts to set up the criteria to restrict the number of items deemed to be prior period adjustments which are to be excluded from net income of the year and thrown back to prior years by restating opening balances of retained earnings. He nevertheless feels that such treatment will result in continuing controversy and will be confusing to users of financial statements. He believes that such treatment should not be mandatory, but rather should be left to the judgment of the managements who have the primary responsibility for proper presentation to stockholders. He therefore recommends that the so-called "all inclusive" statement of income consistently followed and with adequate disclosure of material special items (including extraordinary and prior period items) should be permissive. Mr. Halvorson concurs in the qualified assent expressed by Mr. Walker in respect of the mandatory exclusion of prior period adjustments from the current statement of income, and extends his qualification to the mandatory determination of an arbitrary "income before extraordinary items" within the determination of net income. APB 9 NOTES Opinions present the considered opinion of at least two-thirds of the members of the Accounting Principles Board, reached on a formal vote after examination of the subject matter. Except as indicated in the succeeding paragraph, the authority of the Opinions rests upon their general acceptability. While it is recognized that general rules may be subject to exception, the burden of justifying departures from Board Opinions must be assumed by those who adopt other practices. Action of Council of the Institute (Special Bulletin, Disclosure of Departures From Opinions of Accounting Principles Board, October 1964) provides that: a. "Generally accepted accounting principles" are those principles which have substantial authoritative support. b. Opinions of the Accounting Principles Board constitute "substantial authoritative support." c. "Substantial authoritative support" can exist for accounting principles that differ from Opinions of the Accounting Principles Board. The Council action also requires that departures from Board Opinions be disclosed in footnotes to the financial statements or in independent auditor's reports when the effect of the departure on the financial statements is material. Unless otherwise stated, Opinions of the Board are not intended to be retroactive. They are not intended to be applicable to immaterial items. Accounting Principles Board ( ) Clifford V. Heimbucher, Chairman Joseph P. Cummings Sidney Davidson

7 Marshall S. Armstrong Philip L. Defliese Donald J. Bevis Walter F. Frese John C. Biegler Newman T. Halvorson George R. Catlett LeRoy Layton W. A. Crichley Oral L. Luper i APB9, Footnote 1--Accounting Research Bulletin No. 32, Income and Earned Surplus. ii APB9, Footnote 3 The Board recommends disclosure, in addition, in interim reports issued during that year subsequent to the date of recording the adjustments. iii APB9, Footnote 4--See ARB No. 43, Chapter 2A, Form of Statements--Comparative Financial Statements. iv APB9, Footnote 5--See paragraph 12 of APB Opinion No. 6, Status of Accounting Research Bulletins.