OCW041: Other Distortions

Extraordinary Gains and Losses

Extra gains or losses are nonrecurring, onetime, unusual, non-operating gains or losses that are recorded by a business during the period.

Learning Objectives

Define what makes a gain or loss extraordinary

Key Takeaways

Key Points

  • Extra gains or losses are nonrecurring, onetime, unusual, non-operating gains or losses that are recorded by a business during the period.
  • No items may be presented in the income statement as extraordinary items under IFRS regulations, but are permissible under US GAAP. (IAS 1.87) The amount of each of these gains or losses, net of the income tax effect, is reported separately in the income statement.
  • Examples of extraordinary items are casualty losses, losses from expropriation of assets by a foreign government, gain on life insurance, gain or loss on the early extinguishment of debt, gain on troubled debt restructuring, and write-off of an intangible asset.

Key Terms

  • extraordinary items: unusual (abnormal) and infrequent things that impact the company
  • non-operating: Non-operating in accounting and finance is not related to the typical activities of the business or organization.

Extraordinary Gains and Losses

Extraordinary items are both unusual (abnormal) and infrequent, for example, unexpected natural disaster, expropriation, prohibitions under new regulations. It is notable that a natural disaster might not qualify depending on location (e.g., frost damage would not qualify in Canada but would in the tropics).

Extra gains or losses are the result of unforeseen and atypical events. They are nonrecurring, onetime, unusual, non-operating gains, or losses that are recorded by a business during the period.

No items may be presented in the income statement as extraordinary items under IFRS regulations, but are permissible under US GAAP. (IAS 1.87) The amount of each of these gains or losses, net of the income tax effect, is reported separately in the income statement. Net income is reported before and after these gains and losses. As a result, extraordinary gains or losses don’t skew the company’s regular earnings. These gains and losses should not be recorded very often but, in fact, many businesses record them every other year or so, causing much consternation to investors. In addition to evaluating the regular stream of sales and expenses that produce operating profit, investors also have to factor into their profit performance analysis the perturbations of these irregular gains and losses reported by a business.

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Income statement in accordance with IFRS: This income statement is a very brief example prepared in accordance with IFRS; no extraordinary items are presented.

Examples of extraordinary items are casualty losses, losses from expropriation of assets by a foreign government, gain on life insurance, gain or loss on the early extinguishment of debt, gain on troubled debt restructuring, and write-off of an intangible asset. Write down and write off of receivables and inventory are not extraordinary, because they relate to normal business operational activities.They would be considered extraordinary, however, if they resulted from an Act of God (e.g., casualty loss arising from an earthquake) or governmental expropriation.

Discrepancies

Accounting discrepancies are unintentional mistakes in the delivery of financial statements.

Learning Objectives

Recognize the various reasons a discrepancy may occur, and how to prevent them

Key Takeaways

Key Points

  • Mistakes happen. Being aware of common pitfalls is the best way to avoid accounting discrepancies, though.
  • Discrepancies shouldn’t be confused with irregularities, which are generally assumed to be intentional mistakes to misrepresent data.
  • Data errors, software issues, late payments, and shrinkage may all contribute to potential discrepancies in the tracking of organizational finances.
  • Preventing discrepancies is best, but if a mistake occurs, it is best to address it as soon as possible (as opposed to waiting for an audit to catch it).

Key Terms

  • discrepancies: Accidental misrepresentations of accounting data.
  • accounting irregularity: An intentional misrepresentation of accounting data.

Nobody’s perfect, including accountants. From time to time, discrepancies will arise on financial statements, for a wide variety of reasons. Accounting errors that are not intentional are described as discrepancies (as opposed to an accounting irregularity, which is distinguished from a discrepancy by an intention to defraud). Accounting requires meticulous eye for detail and a strong sense of accuracy and accountability, and financial professionals and internal stakeholders must be careful of errors which could be mistaken for intentional fraud.

Common Discrepancies

Data Errors

All accounting relies heavily on input data from various sources, including accurate inventory counts, revenue reports, sales figures, asset valuations, and a wide variety of other relevant aspects of income statements, balance sheets, and statements of cash flows. Any error from input data points will thus be reflected in the final financial statements, for public companies these are released externally. Catching these errors through careful confirmation of all receipts and cash flows is a central responsibility of both management and the accounting and finance teams.

Late Payments

If a large client is late in providing capital for a service or product provided, this can impact the accuracy of a financial release. Accounts receivable, by their nature, are timed payments with specific deadlines. If an accountant assumes a receivable will be timely, they may potentially create a discrepancy. As a result, all reporting should be done on what actually is, rather than what’s expected to be.

Shrinkage

Particularly relevant for retail outlets is the concept of shrinkage. Shrinkage is the lost inventory/sales that occurs over an operational period. This can be due to petty theft, mismanaged inventory, perishable goods going unrecorded, and a wide variety of other factors. Ensuring that inventory is carefully managed and shrinkage is built into any current financial calculations is important to maintain accuracy and avoid discrepancy.

Bank Reconciliation

While rarely an issue in the long term, bank transfer and capital movements sometimes take time. Taking into account bank reconciliation when viewing the amount shown in a current account and the amount that should be shown is an occasionally cause of temporary discrepancy.

Technology

Modern accounting is largely a software endeavor. Utilizing complex software incurs the potential for complex, hard to catch errors. Having a strong IT team, and accountants familiar with the world of software coding are important assets in modern financial reporting.

Addressing Discrepancies

While perhaps common sense, amending a discrepancy as soon as it is identified is important. Waiting to be audited is not a good tactic, as this will likely result in fees or penalties for inaccurate reporting. Double and triple checking financial statements inputs before building them into public releases is particularly important for this field of work.


Source: Accounting