Extraordinary Items: There have existed over the years differences with respect to the income statement
regarding the proper presentation of extraordinary items as well as adjustments and corrections from prior periods. Two procedures are now considered acceptable alternative treatments:
- Current Operating performance Concept. Extraordinary items are omitted from the income statement and
are closed directly to the statement of retained earnings.
- AU-Inclusive Concept: Extraordinary items are shown separately on the income statement after Net Income from Regular Operations but before Net Income. This procedure is required by the SEC and recommended by the AICPA in Opinions Nos. 9 and 30.
Other Material Gains and Losses. APB Opinions Nos. 9 and 30 not only defined clearly what could be considered
extraordinary items but also clarified treatment of material gains and losses not of an extraordinary nature. Items such as write-downs and write-offs of inventories and receivables (which do not fulfill the dual criteria of being both infrequent in occurrence and unusual in nature) fall into this latter category and are relegated to operating expense sections or to a separate section called Other Income and Expense, both of which appear before the income before extraordinary items figure.
Prior Period Adjustments:
APB Opinion No.9 also includes a provision for prior period adjustments, defined as those rare, material, nonrecurring adjustments which (a) are directly related to the business operations of particular prior periods, (b) are not attributable to business events subsequent to the date of the financial statements for the prior period,(c) are determined by persons other than internal management, and (d) were not determinable during the prior period under consideration. Items which meet all four requirements are not included in the calculation of net income but are reported instead (net of tax) in the statement of retained earnings. Settlement of income tax claims or litigation are examples of prior period adjustments.
Combined Income and Retained Earnings Statement
Some companies combine these two statements in an effort to present a complete picture of both the elements of net income and the changes in retained earnings. All that is required” is to continue beyond net income (or net loss) by adding the beginning balance of retained earnings and deducting dividends declared and any other charges against retained earnings.