ASU 2015-01: Eliminating Extraordinary Items
This guidance simplifies income statement presentation by eliminating the extraordinary items category and integrating unusual events into continuing operations.
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-01 as part of its Simplification Initiative. The primary change was the removal of the concept of “extraordinary items” from Generally Accepted Accounting Principles (GAAP). This modification aimed to streamline the presentation of the income statement, making it more understandable for users.
Previous Accounting for Extraordinary Items
Prior to ASU 2015-01, an event or transaction was classified as an extraordinary item if it met two specific criteria: being unusual in nature and infrequent in occurrence. “Unusual nature” meant the event was highly abnormal and unrelated to the company’s ordinary activities. “Infrequency of occurrence” meant the event was not reasonably expected to happen again in the foreseeable future.
This classification was interpreted narrowly, and few events qualified. Its financial effect was required to be shown separately on the income statement, below the line for “income from continuing operations.” This presentation was also made net of any related income tax effects.
Current Presentation of Unusual or Infrequent Items
ASU 2015-01 eliminated the “extraordinary item” category from income statement reporting. Events, even if they are both unusual and infrequent, are no longer segregated below income from continuing operations. Instead, the financial impact of such events is presented as a component of income from continuing operations, where companies may report them as a separate line item for clarity.
The main driver for this change was to enhance comparability across different financial statements. Stakeholders had often found it difficult to consistently apply the two-part test for extraordinary items, leading to uncertainty and high costs. Removing the classification reduces the effort preparers spent debating whether an event qualified as extraordinary.
Disclosure Requirements
While the special income statement presentation for extraordinary items is gone, transparency about significant events remains. Companies are still required to disclose information about material events and transactions that are either unusual in nature or occur infrequently.
These disclosures are now made within the notes to the financial statements. A company must describe the nature of the event or transaction and its financial effect on the company’s results. This approach maintains the flow of information to investors, simply relocating it from the income statement to the accompanying footnotes.