Comment Letter Summary Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items Objective 1. The objective of this paper is to provide a summary of comments letters received in response to proposed Accounting Standards Update No. 2014-220, Income Statement Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. Background Information 2. On May 28, 2014, the Board added a project to its agenda and decided to eliminate the concept of extraordinary items from generally accepted accounting principles (GAAP). At that meeting, the Board directed the staff to draft a proposed Accounting Standards Update. 3. The project is part of the Board's Simplification Initiative, the objective of which is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of information provided to users of financial statements. The primary objective of eliminating the concept of extraordinary items from GAAP is to reduce the cost and complexity of income statement presentation while maintaining the usefulness of information provided to financial statement users. 4. On July 15, 2014, the proposed Update was issued for public comment with a comment letter period that ended September 30, 2014. Page 1 of 7
Summary of Comment Letters Received 5. The Board received 36 comment letters, which are summarized below by the type of respondent: Constituency Type Number of Respondents Accounting Students 11 Professional Accounting Organizations 11 Accounting Firms 10 Industry Trade Groups 2 Preparers 1 Individuals 1 Total: 36 6. Overall, respondents supported the proposed Update and agreed that eliminating the concept of extraordinary items would reduce the cost and complexity of financial reporting while maintaining the usefulness of information presented in the financial statements. Issue 1: Eliminating the Concept of Extraordinary Items 7. The guidance in the proposed Update would eliminate the concept of extraordinary items from GAAP. Specifically, the proposed Update would remove the requirement in Subtopic 225-20, Income Statement Extraordinary and Unusual Items, that entities separately classify, present, and disclose extraordinary events and transactions. The presentation and disclosure guidance for items that are unusual in nature or infrequently occurring would be retained. 8. Respondents unanimously supported eliminating the concept of extraordinary items. Generally speaking, respondents reasoned that eliminating extraordinary items would reduce cost and complexity in financial reporting by (a) alleviating uncertainty about whether an event or transaction qualifies as an extraordinary item and (b) removing the associated complex presentation and disclosure requirements (for example, intraperiod tax allocation and earnings-per-share data). Page 2 of 7
9. Many respondents stated that it is rare in practice for an event or transaction to meet the requirements to be presented as an extraordinary item. Furthermore, many respondents noted that they must expend time and effort evaluating the transaction or event against the extraordinary item criteria to reach a conclusion that a transaction or event is not extraordinary. Those respondents added that retaining the presentation and disclosure requirements for events and transactions that are unusual in nature or infrequent in occurrence would provide sufficient information for financial statement users. 10. In addition, some respondents supported the proposed Update because eliminating the concept of extraordinary items would more closely align GAAP with IFRS (which prohibits extraordinary item presentation). Issue 2: Transition and Effective Date Transition Method 11. The proposed Update would require prospective application of the guidance from the date of adoption because the Board reasoned that this would be the least costly and complex transition method. In reaching that decision, the Board acknowledged that retrospective adoption would provide a benefit in terms of comparability but, ultimately, the Board decided that this benefit did not justify the potential costs. 12. While most respondents agreed that the proposed Update should be applied prospectively, a few respondents recommended that entities be permitted to retrospectively apply the proposed Update. Those respondents noted that, in most cases, the cost of retrospective application (with items previously classified as extraordinary items reclassified into income from continuing operations) would not be significant compared with the benefit and would provide users with a consistent presentation for all periods presented in the financial statements. Page 3 of 7
13. In addition, one respondent noted that retrospective adoption might eliminate the need for transition guidance regarding subsequent adjustments to amounts previously reported as extraordinary items. Specifically, BDO (CL#17) stated the following: We note allowing retrospective adoption would obviate the need for the proposed transition guidance related to the adjustment of an extraordinary item reported in a prior period, which the Codification currently addresses in paragraph 225-20-45-13 1 for items such as true-ups of earlier estimated costs. That is, retrospective adoption would preempt the issue that otherwise needs to be addressed under prospective adoption. Transition Disclosures 14. The guidance on other presentation matters in Subtopic 250-10, Accounting Changes and Error Corrections Overall, is applicable for a change in accounting principle. Paragraphs 250-10-50-1 through 50-3 require an entity to disclose the nature and reason for an accounting change, the quantitative effect of the change on an entity s financial statements, and any indirect effects of the accounting change, among other things. 15. To comply with all of those disclosures, an entity would be required to assess whether or not an extraordinary item has occurred under GAAP before and after the accounting change in the year of adoption (including for each interim period). However, in order to simplify transition, the Board decided to only require transition disclosure of items included in income from continuing operations after adoption that relate to extraordinary items presented before adoption, if applicable. Furthermore, the Board decided that qualitative disclosure would be sufficient to satisfy this requirement. 1 Paragraph 225-20-45-13 states that circumstances attendant to extraordinary items frequently require estimates, for example, of associated costs and occasionally of associated revenue, based on judgment and evaluation of the facts known at the time of first accounting for the event. Each adjustment in the current period of an element of an extraordinary item that was reported in a prior period shall be classified separately in the current period in the same manner as the original item. Page 4 of 7
16. Most respondents did not comment on transition disclosures. However, some respondents recommended requiring disclosure of the financial effects of adjustments to amounts previously reported as extraordinary items. One respondent noted that quantitative disclosure of material post-adoption adjustments would be consistent with the required disclosures for other unusual or infrequently occurring items. Specifically, PwC (CL#13) stated the following: We disagree with the Board s conclusion that disclosure of the amount of material post-adoption adjustments to previously reported extraordinary items is unnecessary. We believe such amounts should be disclosed, consistent with other unusual or infrequently occurring items. Effective Date and Early Adoption 17. Virtually all respondents agreed that the proposed Update should become effective in annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. Furthermore, no respondents stated that there should be a delay in the effective date for entities other than public business entities. 18. One respondent, however, raised a related issue that an entity could present an extraordinary item (or an adjustment to a previously reported extraordinary item) on the income statement sometime in the first half of the year, early adopt the standard in the third quarter, and apply the standard prospectively. In particular, BDO (CL#17) provided the following example: For example, an entity may early adopt in the interim period ended September 30, 2015. It will subsequently prepare annual financial statements for the year ended December 31, 2015. A question arises as to whether the annual financial statements could reflect an extraordinary item in the first six months of the year (or an adjustment to a previously reported extraordinary item under 225-20-43-13), while the last six months of the year would not. We note allowing retrospective adoption would alleviate this situation too. Page 5 of 7
Other Issues Raised in Comment Letters Unusual or Infrequent Items 19. One respondent expressed a concern that, as a result of eliminating the concept of extraordinary items, there no longer would be any guidance for events and transactions that are both unusual in nature and infrequent in occurrence. This respondent said that the guidance that would remain could be interpreted as only applying to events and transactions that are unusual in nature or infrequent in occurrence. Specifically, PwC (CL#13) stated the following: We believe that it would be useful to clarify in the final standard that the presentation and disclosure requirements for items that are both unusual in nature and infrequently occurring would be the same as those currently required for items that are either unusual in nature or infrequently occurring. 20. Another respondent suggested that the Board reconsider the adequacy of the guidance for applying the definitions of unusual nature and infrequency of occurrence. Specifically, Marcum (CL#5) stated the following: We concur with the Board s decision to retain the broad principle of providing for the separate presentation and disclosure of unusual or infrequent events or transactions within reported results of continuing operations. However, we have seen situations within our firm s own practice, from reviewing the financial statements of non-clients, and from discussions with practitioners at other public accounting firms, where current practice has strayed significantly from the types of events and transactions originally suggested in the Board s existing definitions of infrequency of occurrence or unusual nature. Additional implementation guidance would provide clarity to assist in the determination of the types of unusual or infrequently occurring items that qualify for presentation as a separate line item on the face of the income statement. Page 6 of 7
Drafting Considerations 21. A few respondents provided drafting suggestions in their comment letters. The most significant comments relate to Codification amendments contained in Topic 740, Income Taxes. One respondent in particular suggested that the Board consider whether guidance regarding intraperiod tax allocations should be clarified to reduce potential varying interpretations in this area. Specifically, KPMG (CL#35) stated the following: We noted three instances within the proposed Update where other comprehensive income is added to the existing text of the codification While the additions are helpful in the sense that they provide additional guidance to preparers and auditors, they do not appear to be relevant to the stated objective of the proposed Update. Although there may be different interpretations of existing GAAP in these areas, we agree that the addition of other comprehensive income in each of the paragraphs is helpful in clarifying the existing guidance and represents an appropriate interpretation of existing GAAP. However, the addition of other comprehensive income in each of these paragraphs may warrant further discussion by the Board and potentially outreach with users, preparers, auditors, and other stakeholders if it is found the interpretations vary significantly. Page 7 of 7