Statement of Financial Accounting Standards No. 4

INTRODUCTION AND BACKGROUND INFORMATION
APB Opinion No. 26, «Early Extinguishment of Debt,» became effective for
extinguishment of debt occurring on or after January 1, 1973. Paragraph 19 of that Opinion
states «that all extinguishments of debt before scheduled maturities are fundamentally alike. The
accounting for such transactions should be the same regardless of the means used to achieve the
extinguishment.» Paragraph 20 of the same Opinion states that «a difference between the
reacquisition price and the net carrying amount of the extinguished debt should be recognized
currently in income of the period of extinguishment as losses or gains and identified as a separate
item…. The criteria in APB Opinion No. 9 [‘Reporting the Results of Operations’] should be used
to determine whether the losses or gains are ordinary or extraordinary items. Gains and losses
should not be amortized to future periods.»
APB Opinion No. 30, «Reporting the Results of Operations,» became effective for events
and transactions occurring after September 30, 1973 and superseded APB Opinion No. 9 with
respect to the determination of extraordinary items. APB Opinion No. 30 and the related
Accounting Interpretation issued by the AICPA staff (see The Journal of Accountancy,
November 1973, pages 82-84) can be read literally to preclude classifying most if not all gains or
losses from early extinguishment of debt as an extraordinary item in the income statement. The
Board has observed that in those cases coming to its attention where a gain or loss from early
extinguishment of debt has been reported in an income statement to which APB Opinion No. 30
was applicable, the gain or loss was included in income before extraordinary items.
Since the effective date of APB Opinion No. 30, the Board has had inquiries regarding that
Opinion because application of the criteria, especially as illustrated in the related AICPA
Accounting Interpretation, appears to preclude classifying gains or losses from most transactions
or events as extraordinary items in the income statement. Many respondents to the Board’s July
12, 1973 request for views concerning APB Opinions and Accounting Research Bulletins
suggested that the conclusions of APB Opinion No. 26 relating to early extinguishment of debt
be reconsidered. Since that time, concern also has been expressed to the Board with respect to
the accounting for extinguishment of debt at its scheduled maturity date or later because the
authoritative accounting pronouncements do not address that issue. In addition, the Securities
and Exchange Commission and others have expressed concern to the Board about including
gains and losses from extinguishment of debt in the determination of income before
extraordinary items in the income statement.
The Board considered carefully the suggestions that APB Opinion No. 26 be reconsidered
and concluded that the issues extend beyond APB Opinion No. 26 and could involve APB
Opinion No. 14, «Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants,» and APB Opinion No. 21, «Interest on Receivables and Payables,» and could extend
to exchanges or sales and related purchases of similar monetary assets. The Board concluded that
the pervasiveness of those issues makes broad reconsideration of all these Opinions and the other
related issues a more comprehensive undertaking than can be accomplished in the near future.
The Board also considered carefully the questions raised with respect to APB Opinion No. 30
and concluded that there is insufficient experience under that Opinion to warrant a general
reconsideration of the criteria set forth therein at this time.
Prior to the issuance of the Exposure Draft of this Statement, the Board had been
considering an Interpretation of APB Opinion No. 26 that would have specified disclosure
requirements regarding gains and losses from extinguishment of debt, but that course of action
was changed when it became clear to the Board that the income statement classification of gains
or losses on extinguishment of debt also required attention. The Board believes that an
immediate response is needed to the concern expressed regarding income statement
classification of gains and losses from certain extinguishments of debt. Further, the Board
continues to believe that guidelines are needed regarding disclosures related to certain debt
extinguishments because a review of a number of financial statements by the FASB staff
indicates that disclosures often have been unclear, particularly with regard to the income tax
effects.
The Board has concluded that on the basis of existing data it can make an informed
decision on the narrow issues identified in paragraph 5 without a public hearing and that the
effective date and transition requirements set forth in paragraphs 11 and 12 are advisable.
This Statement applies to regulated enterprises in accordance with the provisions of the
Addendum to APB Opinion No. 2, «Accounting for the ‘Investment Credit.'»