Financial Accounting: An Integrated Statements Approach, 2nd Edition

UNUSUAL ITEMS AFFECTING THE

INCOME STATEMENT

Generally accepted accounting principles require that certain unusual items be re-

ported separately on the income statement. These items can be classified into the fol-

lowing two categories:

1. Unusual items that are subtracted from gross profit in determining income from con-
   tinuing operations. These items are reported aboveincome from continuing operations.


2. Unusual items that adjust income from continuing operations in determining net
   income. These items are reported belowincome from continuing operations.

In the following paragraphs, we discuss each of these unusual items.

Unusual Items Reported Above Income from

Continuing Operations

Some unusual items are deducted from gross profit in arriving at income from con-

tinuing operations. These unusual items consist of fixed asset impairments and re-

structuring charges; these are sometimes termed special chargeswhen combined

together.

Fixed Asset Impairments. Afixed asset impairmentoccurs when the fair value of

a fixed asset falls below its book value and is not expected to recover.^1 Examples

of events that might cause an asset impairment are (1) decreases in the market price of

fixed assets, (2) significant changes in the business or regulations related to fixed

assets, (3) adverse conditions affecting the use of fixed assets, or (4) expected cash flow

losses from using fixed assets.^2 For example, on March 1, assume that Jones Corporation

consolidates operations by closing a factory. As a result of the closing, plant and equip-

ment is impaired by $750,000. The journal entry to record the impairment is as follows:

538 Chapter 12 Special Income and Investment Reporting Issues

Prepare an income

statement reporting the

following unusual items:

fixed asset impairments,

restructuring charges,

discontinued operations,

extraordinary items, and

cumulative changes in

accounting principles.

1

Mar. 1 Loss on Fixed Asset Impairment 750,000

Fixed Assets—Plant and Equipment 750,000

1 Fixed assets that are discontinued components, such as an operating segment, subsidiary, or asset

group, should be treated as discontinued items as discussed in a later section.

2 Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-

Lived Assets” (Norwalk, CT: Financial Accounting Standards Board, 2001).

The loss on fixed asset impairment is reported as a separate expense item deducted

from gross profit in determining income from continuing operations, as illustrated for

Jones Corporation in Exhibit 1. In addition, note disclosure should describe the na-

ture of the asset impaired and the cause of the impairment.

The loss reduces the book value of the fixed asset and thus reduces the deprecia-

tion expense for future periods. If the asset could be salvaged for sale, the gain or loss

on the sale would be based on the lower book value. Therefore, asset impairment ac-

counting recognizes the loss when it is first identified, rather than at a later sale date.

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