The definition of extraordinary items, as defined in AAS 1: Profit and Loss or other Operating Statements, was amended in 1989 in favour of a new more restrictive definition requiring that extraordinary items exhibit the characteristics of being both outside the firms' ordinary operations and non-recurring. This definition is mirrored by ASRB 1018 (now AASB 1018). Although both sets of rules were approved in 1989 (the AAS1 amendments being publicly announced in January of that year), they were to apply to financial statements dated after 31 December 1989. Although there are no direct balance sheet implications, the classification of recurring items as extraordinary in 1989 can have direct valuation implications through financial contracts.
This thesis empirically investigates the economic determinants of firms' extraordinary items accounting policy choice. Specifically, this study focuses on the classification and disclosure of net recurring gains (and losses) as extraordinary in 1989. Evidence is produced which suggests that managers of low earning firms tended to take a 'bath' through extraordinary items. Further, evidence is also documented which suggests that managers tended to use the less restrictive extraordinary items definition to smooth 1989 operating earnings. The political visibility of firms (measured by size) as well as the presence of management compensation contracts, is also significant in explaining the accounting policy choice. No evidence is found to support the proposition that interest coverage constraints explain the recurring extraordinary item accounting policy choice.