Special Reporting Issues
Special, or irregular, items appear on single step or multi-step income statements, and require special reporting procedures. They are reported separately, and net of taxes, so that stakeholders can better predict future cash flows. Two examples of irregular items are discontinued operations and extraordinary expenses.
Discontinued operation is the most common type of irregular item. It pertains to the elimination of a significant portion of a firm's business, such as the sale of a division. Shifting business location(s), stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations.
Extraordinary items are both unusual (abnormal) and infrequent -- for example, unexpected natural disasters, expropriation, and prohibitions under new regulations. If an item is unique, but does not fit the criteria of being unusual and infrequent, it must remain in the main section of the income statement. No items may be presented in the income statement as extraordinary items under IFRS regulations, but are permissible under US GAAP.
Other special reporting issues include Earnings per Share, Retained Earnings and Intraperiod Tax Allocation.
Earnings per Share: If a company reports any irregular items on its income statement, then it must report earnings per share for those items. The earnings per share can appear on the income statement or in the notes to the income statement. Earnings per share measures the dollars earned by each share of common stock. Earnings per share are calculated as net income, with preferred dividends/weighted number of shares outstanding. There are two forms of earnings per share that are reported: basic and diluted. For basic earnings per share, the weighted average of shares outstanding includes only actual stocks outstanding. In diluted, the weighted average of shares outstanding is calculated as if all stock options, warrants, convertible bonds and other securities that could be transformed into shares are transformed. Diluted earnings per share are considered a more reliable way to measure earnings per share.
Retained Earnings: The statement of retained earnings explains the changes in a company's retained earnings over the reporting period. It is required by the U.S. Generally Accepted Accounting Principles (U.S. GAAP) whenever comparative balance sheets and income statements are presented. It may appear in the balance sheet, in a combined income and changes in retained earnings statement, or as a separate schedule. In essence, the statement of retained earnings uses information from the income statement and provides information to the balance sheet. The statement breaks down changes in the owners' interest in the organization, and also in the application of retained profit or surplus from one accounting period to the next. Line items typically include profits or losses from operations, dividends paid, the issue or redemption of stock, and any other items charged or credited to retained earnings.
Intraperiod Tax Allocation: With intraperiod tax allocation, the specific item (or items) that generated the income tax expense are shown on the income statement with the applicable tax amount applied. Income tax is allocated to income from continuing operations before tax, discontinued operations and extraordinary items.