Communication Case
Ethics Case 4-7 – Income Statement Presentation of Unusual Loss Requirement The Cranor Corporation suffered $10 million in expenses linked to a product recall. The company had endured product recalls in the past and they still occur in the business. To show revenue from continuing operations, Jim Dietz, the controller, wishes to describe the $10 million as an extraordinary loss, instead of an expense included in operating income. He states to the CEO that the company has never had a product recall of this size and that the corporation fixed the design flaw and improved quality control. The drawback is, in order for Jim to categorize the loss as an extraordinary item, he must view that the losses in the company’s financial statements are infrequent and unusual. He must also presume this event is not likely to occur again in the future profitability. (Spiceland, Sepe, & Nelson, 2013, p. 188)
The Journal of Accountancy states that extraordinary items are gains and losses that are material, and result from events that are both unusual and infrequent. (Extraordinary Items Share Exclusive Company , 2013) These criteria must be considered in light of the environment in which the entity operates. There obviously is a considerable degree of subjectivity involved in the determination. The concepts of unusual and infrequent require judgment. In making these judgments, an accountant should keep in mind the overall objective of the income statement. The key question is how the event relates to a firm’s future profitability. If it is judged that the event, because of its unusual nature and infrequency of occurrence, is not likely to occur again, separate reporting as an extraordinary item is warranted.
The ethical dilemma faced by Jim Dietz and the company’s chief executive officer is that it appears from the facts of the case that it would be difficult for the company to come to the conclusion that a material product recall is not likely to occur again
The Journal of Accountancy states that extraordinary items are gains and losses that are material, and result from events that are both unusual and infrequent. (Extraordinary Items Share Exclusive Company , 2013) These criteria must be considered in light of the environment in which the entity operates. There obviously is a considerable degree of subjectivity involved in the determination. The concepts of unusual and infrequent require judgment. In making these judgments, an accountant should keep in mind the overall objective of the income statement. The key question is how the event relates to a firm’s future profitability. If it is judged that the event, because of its unusual nature and infrequency of occurrence, is not likely to occur again, separate reporting as an extraordinary item is warranted.
The ethical dilemma faced by Jim Dietz and the company’s chief executive officer is that it appears from the facts of the case that it would be difficult for the company to come to the conclusion that a material product recall is not likely to occur again
References: The Quest Study Bible, New International Version. (1994). Grand Rapids: Zondervan Publishing House. Extraordinary Items Share Exclusive Company . (2013, September 3). Retrieved from Journal of Accountancy: http://www.journalofaccountancy.com/Issues/2007/May/ExtraordinaryItemsShareExclusiveCompany.htm Handbook of the Code of Ethics for Professional Accountants. (2013). New York: International Federation of Accountants. Spiceland, D., Sepe, J., & Nelson, M. (2013). Intermediate Accounting (7th ed.). New York: McGraw-Hill/Irwin.