Over time, the FASB and IFRS banned the term ‘extraordinary items’ in the income statement. Extraordinary items, you might remember, had to be unusual in nature and happen infrequently, often described as ‘one-off’ or once in a lifetime events. They distort the regularity of growth in profits, and as you know directors prefer regular growth, and the way they show regularity is to take out one-off expenses. The standards setters disagree. They want everything to be ordinary, even if infrequent expenses don’t disappear because accounting bodies decide to prohibit a word.
But the standards setters do admit that unusual, significant and material items come up from time to time, and need to be disclosed separately. That’s all they say: no other rules, so accountants brought extraordinary items back in different disguises. There are so many of them now that income statements now have an abundant variety of inventive words.
Some income statements replace extraordinary with exceptional. An exceptional item is, after all, close to extraordinary and adequately describes the unusual and infrequent. Others present expenses under the label ‘special items’. Yet others have translated infrequently into ‘non-recurring items’ to explain their extraordinary items. A few don’t like items and simply call them ‘other adjustments’. Significant is a popular word in describing going concern and has been transformed into ‘significant items’, while others believe notable is better than significant and use ‘notable items’. But the latest trend, are the words ‘adjusted’ and ‘non-underlying’: a door opener to extend exceptional items to anything whether it be unusual or recurring or not.
Exceptional
Special
Non-recurring
Other adjustments
Significant
Notable
Unusual
Infrequent
Adjusted
Non-underlying
Accounting literature now refers this as ‘managerial classificatory choice’.
But some accountants don’t bother with names. They add an extra line usually before operating profit stating a particular expense. No explanation, just a description. Others publish nothing, making the income statement short, sharp and clean. They go straight to ‘net profit before tax’. Anything they want to tell us, they put in the notes, not in the income statement.
The result is ten alternative words and two presentation formats of the income statement to replace the simple ‘extraordinary item’. I imagine companies exaggerated and abused the previous extraordinary item reporting and the standard setters got upset and abolished it. Today companies exaggerate and abuse the ban of extraordinary items and the standard setters are not yet upset enough to change it.
Despite such abundant variety, a de facto consensus has occurred in what companies include in special, non-occurring, one-off or whatever expenses. They have chosen four: restructuring costs, impairment losses, legal settlements and sometimes severance programmes. Nothing for income.
However, the clearest example comes from the companies themselves, when they try to explain their managerial classificatory choice with statements such as this:
“Exceptional items have been recognised in respect of once-off exceptional items.”