G ap provides the following guidance in determining

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G AP provides the following guidance in determining whether or not an item is extraordinary: Unusual nature. The underlying event or transaction must possess a high degree of abnor- mality and be clearly unrelated to, or only incidentally related to, the ordinary activities of me entity. accounting standards included a third category, changes in accounting principles. This category included volun- _ and mandated changes in accounting policies utilized by a company, such as a change in the depreciation method. current GAAP, changes in accounting principles are no longer reported below-the-line. Instead, they are applied ctively (unless it is impractical to do so, in which case they are applied at the earliest practical date). No cumu- ~effect adjustment is made to income as was the case in prior standards. Instead, changes in depreciation methods w accounted for as changes in estimates, which are applied prospectively.
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Infrequency of occurrence. The underlying event or transaction must be of a type that would not reasonably be expected to recur in the foreseeable future. The following items are generally not reported as extraordinary items: Gains and losses on retirement of debtS Write-down or write-off of operating or nonoperating assets Foreign currency gains and losses Gains and losses from disposal of specific assets or business segment Effects of a strike Accrual adjustments related to long-term contracts Costs of a takeover defense Extraordinary items are reported separately (net of tax) and below income from continuing opera- tions on the income statement. 5-29 Module 5 I Revenue Recognition and Operating Income L05 Compute earnings per share and explainthe effect of dilutivesecurities. IFRS INSIGHT Extraordinary Items and IFRS IFRS does not permit the reporting of income and expense items as "extraordinary." The IASB justi- fied its position in IAS1 as follows: "The Board decided that items treated as extraordinary resu" from the normal business risks faced by an entity and do not warrant presentation in a separate component of the income statement. The nature or function of a transaction or other event, rather than its frequency, should determine its presentation within the income statement. Items curren classified as 'extraordinary' are only a subset of the items of income and expense that may warrant disclosure to assist users in predicting an entity's future performance" (IAS1). Earnings Per Share and its Analysis The income statement reports earnings per share (EPS) numbers. Most firms report two EPS num- bers: basic and diluted. The difference between the two measures is shown in Exhibit 5.9. ~ Basic and Diluted EPS Computations Basic EPS ~ I •• 2~ " Net Income less Preferred Dividends WeightedAverage Common Shares " , ~ Diluted EPS Basic EPS is computed as: (Net income - Dividends on preferred stock)!Weighted average num- ber of common shares outstanding during the year. Subtracting preferred stock dividends yields the income available for dividend payments to common shareholders. Computation of diluted EPS
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