Academic journal article Journal of Financial Management & Analysis

Canadian Firms' Characteristics vs Their Position towards Tightening Reporting Requirements of Extraordinary Accounting Items Classification

Academic journal article Journal of Financial Management & Analysis

Canadian Firms' Characteristics vs Their Position towards Tightening Reporting Requirements of Extraordinary Accounting Items Classification

Article excerpt


One of the many consequences of the globalization of business practices is the need to harmonize the different and sometimes conflicting reporting standards in vogue throughout the world or at least in vogue within a country's trading partners. A common solution to this problem is for the country to adopt its own standard or alternatively to adopt a particular international standard, with or without modifications. However, even among accounting standards setting bodies, controversies abound, resulting in sometimes frequent and often uncoordinated changes, in spite of the recent efforts towards harmonization (e.g., Joshi, 1998(1); Rivera, 1989(2); Spector, 1998)3. The principal reason for this state of affairs is the lack of enforcing powers on the part of international standard setting committees. For example, the International Organization of Securities' Commission has lobbied, as yet unsuccessfully, for the endorsement of mandatory reporting requirements in the multinational offerings and listings of other foreign issues of equities and debt securities. Even the International Accounting Standards Committee (ISAC) lacks the power to make its standards mandatory, despite the fact that it is the most influential body in the advancement of accounting harmonization. Joshi (1998) presents ap excellent discussion on this point.

Hence, regardless of the approach followed, there is the need for a standard's acceptance by the users and providers of accounting information, if one of the fundamental principles of accounting information, namely its usefulness for decision making, is going to be satisfied. It is this aspect that is the primary mover for several accounting standards, including that related to Extraordinary Items, which focus on the measurement of income, value of assets and liabilities in a manner that will be relevant and useful for investors, lenders and other stakeholders of the firm. Their worldwide acceptability is expected to substantially ease their sometimes conflicting impact on the measurement of income, liability and ultimately of the all important at the international level financial risk. An excellent example of this controversy is the effort to standardize the reporting standards to account for deferred taxes (e.g. Arcelus and Srinivasan, 1999;(4) Chattopadhyay, et. al., 1997;(5) Ramachandran, et. al., 1991(6); Srinivasan, 1996(7)).

At issue in this paper is the political process needed to achieve broad consensus on the advisability of adopting a given standard. The expectation is that the higher the interest of a firm on the outcome of the standards process, the higher the likelihood of participating in such a process. This paper considers one such case by analysing and contrasting Canadian firm's characteristics with their position towards tightening the requirements of extraordinary items classification.


In 1989 the Canadian Institute of Chartered Accountants (CICA) prepared an exposure draft (CICA, 1989(8)) to propose amendments to the income statement classification of the results of discontinued operations (DO) and extraordinary items (EI). The primary purpose (Abekah and Betts, 1992(9)) was (i) to restrict the reporting as El to results attributed exclusively to external intervention, including acts of nature; and thus (ii) explicitly limit such classifications to those economic events which do not depend primarily on decisions or determinations by owners or management. The draft's tightened requirement on classifying extraordinary items was a response to the investment community's assertions of inconsistent reporting practices (e.g., OSC., 1991;(10) Betts, 1991(11)). It also falls in line with the current trend toward reducing accounting choice and, as alluded to earlier, toward harmonizing accounting standards throughout the world.

Before the current recommendations became mandatory, firms could impact the final recommendations through the weight of their written comments, as a result of the CICA's invitation to comment. …

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