| 1 | Purpose: to recommend criteria for use in identifying material extraordinary charges and credits which ... should be excluded from ...net income and to recommend methods of presenting these charges and credits. | |
| 2 | The danger of
understatement
or overstatement of income must be recognized
An important objective should be the avoidance of any practice that leads to income equalization (income manipulation, or income smoothing) |
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| 3 | Income
is
used to describe a general concept, not a specific and precise thing;
the income statement is based on the concept of the going concern. Profits are not fundamentally the result of operations during any short period of time Allocations to fiscal periods ... affecting the determination of net income are, in part, estimated and conventional and based on assumptions that may be invalidated by experience. |
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| 4 | ...net income has ben used indiscriminately and often without precise, and ... uniform definition... | |
| 5 | ...the above facts with respect to the income statement and the income which it displays make it incumbent upon readers of financial statements to exercise great care at all times in drawing conclusions from them. | |
| Income concepts | ||
| 6 | All-inclusive concept--inclusion of all items affecting affecting the net increase in proprietorship during the period except dividend distributions and capital transactions. | |
| Current operating performance concept--places its principal emphasis upon relationship of items to the operations, and to the year, excluding ... any material extraordinary items which are not so related, or which, if included, would impair the significance of net income so that misleading inferences might be drawn therefrom. | ||
| 7 | Arguments for all-inclusive income concept: | |
| Annual income statements, taken for the life of the business, should, when added together, represent total net income. | ||
| There is a danger of possible income manipulation if material extraordinary items may be omitted in the determination of income. | ||
| Over a period of years, charges tend to exceed credits from extraordinary events, and the omission of such items has the effect of indicating a greater earning performance than actually achieved. | ||
| an income statement
which includes
all income charges or credits arising during the year is:
a) simple to prepare
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| Material differences in the treatment of borderline cases may develop and there is danger that the use of distortion as a criterion may be a means of accomplishing the equalization of income | ||
| The user of the financial statements can make his own additions or deductions more effectively than can the management or the independent accountant. | ||
| 8 | Income statements of
the past
are of only limited help in the forecasting of the earning power of an
enterprise.
Extraordinary items are part of the earnings history of the company, and should be given weight in any effort to make financial judgments with respect to the company. Judgment as to the financial
affairs of an
enterprise should involve a study of the results over a period of prior
years, rather than of a single year, the omission of material
extraordinary
items from annual income statements is undesirable since there would be
a greater tendency for those items to be overlooked in such a study.
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| 9 | Arguments for Current Operating Performance Income concept | |
| Users attach a
particular business
significance to the income statement.
Many users are not trained to analyze a statement and eliminate from it those unusual and extraordinary items that tend to distort it for their purposes. It is difficult to report in any financial statement sufficient data to afford a sound basis upon which the reader who does not have an intimate knowledge of the facts can make a well-considered classification. Management and the independent auditors are in a better position than outsiders to determine if there are unusual and extraordinary items ... Net income for the year should show as clearly as possible what happened in that year under that year's conditions in order that sound comparisons may be made with prior years and with the performance of other companies. |
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| 10 | This group agrees with the all-inclusive advocates in asserting that there should be full disclosure of al material charges or credits of an unusual character ..., but insist that disclosure should be made in such a manner as to not distort the figure which represents what the company was able to earn from its usual or typical business operations under the conditions existing during the year. | |
| 11 | ... 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 . . . relates to items which in the
aggregate
are material 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.
Only extraordinary items such as the following may be excluded from net income of the year, and they should be excluded when their inclusion would impair the significance of net income so that material inferences might be drawn therefrom * Material charges or credits ... specifically related to operations of prior periods * Material charges or credits resulting from unusual sales of assets not acquired for resale and not of the type in which the company usually deals; * Material losses of a type not usually insured against, such as those resulting from wars, riots, earthquakes, and similar calamities or catastrophes except where such losses are a recurrent hazard of the business * The write-off of a material amount of intangibles * The write-off of material amounts
of unamortized
bond discount or premium and bond issue expenses at the time of
retirement
or refunding of the debt before maturity
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