Describe how the reporting of extraordinary items is a good example of the shift away from finite uniformity to rigid uniformity in accounting standards.

Question

What will be an ideal response?

Answer 1

ANSWER:
The shift in the reporting of extraordinary items away from finite uniformity to rigid uniformity was necessitated because the concept of finite uniformity was thought to be abused in accounting practice. The basis of the controversy was the impact that extraordinary items may have on financial statement users’ perceptions of the rules of operations and projections of future operations for the reporting entity. Evaluating the results of current and past operations and projecting future operations relies heavily on an ability to separate normal, recurring components of comprehensive income from those that are not recurring.

Prior to APB Opinion No. 9, accounting practice for extraordinary items was not uniform. APB Opinion No. 9 attempted to bring order by requiring display of all extraordinary items in a specifically designated section of the income statement. It also provided a new definition of extraordinary item as “Events and transactions of material effect which would not be expected to recur frequently and which would not be considered as recurring factors in any evaluation of the ordinary operation processes of the business.” This new definition was still ambiguous, so the APB issued APB Opinion No. 30, which resorted to rigid uniformity and virtually eliminated the existence of extraordinary items because the definition of and criteria for an extraordinary item was so restrictive. For an item to qualify as extraordinary, it had to be both unusual in nature and infrequent in occurrence.