E describe the financial reporting treatment and analysis of non-recurring items (including discontinued operations, extraordinary items, unusual or infrequent items) and changes in accounting standards;

Question 1

Non-recurring items

Answer 1

Discontinued operations: Management has decided to dispose of, but either has not yet done so, or has disposed of in the current year after the operation has generated income or losses.

Extraordinary Items: Unusual + Infrequent items = losses from expropriation of assets, Gains or losses from early retirement of debt, uninsured losses from natural disasters.

Unusual Items: ‘unusual’ in nature: G or L from asset sales or selling part of the business

Infrequent Items: ‘infrequent’ in occurrence. Impairments, write offs, write downs, restructuring costs.

Question 2

Discontinued operations

Answer 2

Asset on the BS. Appears on CF as w/e it is. Must be physically and operationally distinct from the rest of the firm. No NI effect from continued operations.
Analyst: Exclude from future forecasts.

Question 3

Extraordinary items

Answer 3

Report separately: Report net of tax after inc. from cont. operations. IFRS DOESN’T SEPERATE

Question 4

Unusual items, infrequent

Answer 4

Include in income from continued operations, reported before tax

Question 5

Unusual + Infrequent analytical implications

Answer 5

Determine whether they’re material in forecasting future firm earnings. Extraordinary analytical implications do not affect income from continuing operations - review accident prone companies who may report this often.

Question 6

Changes in accounting standards

Answer 6

A change in acct principles: Ex: LIFO to FIFO
A change in acct estimates: Management changes estimates due to new information
Prior-period adjustments:

Question 7

A change in acct. principles

Answer 7

Requires a retrospective application( enhances comparability of financial statements over time)

Question 8

A change in acct estimates

Answer 8

Typically does not affect CF but review changes in acct estimates to determine the impact on future OPERATING RESULTS

Question 9

Prior period adjustments

Answer 9

REstate results for all prior periods presented in the current financial statemens. Disclousre of the nature of the adjustment and its effect on NI is also required.

Analytical implications: involves errors or new acct standards which do not affect cash flow. Review adjustments carefully because errors may indicate weaknesses in the firms internal controls.