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FASB rules on attacks
October 1, 2001: 12:49 p.m. ET

Accounting board: Firms can't account for attacks as extraordinary items
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - A task force of the Financial Accounting Standards Board has decided that the Sept. 11 terrorist attacks are not "extraordinary" events, meaning companies are supposed to include the impact of the event as part of their continuing business operations.

"While the events of September 11 were certainly extraordinary, the financial reporting treatment that uses that label would not be an effective way to communicate the financial effects of those events and should not be used in this case," said a statement issued Monday by the board, which sets guidelines for businesses to follow when reporting results.

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  "While the events of  September 11 were certainly extraordinary, the financial reporting treatment that uses that label would not be an effective way to communicate the financial effects of those events and should not be used in this case."  
     
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  Statement from Financial Accounting Standards Board
on how to treat costs of Sept. 11 attack on quarterly income statements.
 
Companies often exclude charges from restructuring, closings of operations or other significant changes in operations as a extraordinary event that does not affect results from ongoing operations. That allows analysts and investors a standardized method to compare results between companies and over time at the same company.

But the decision may actually allow companies to break out more costs, not fewer, due to the attack, said Chuck Hill, director of research for earnings tracker First Call.

"I'm disappointed and I am surprised," Hill said of the FASB decision. "I think it would have been useful to have an extraordinary category. Now it's going to be easier to make it sound like all this indirect stuff was a result of the attack."

Hill said that while companies and their accounting firms will not be able to use the term "extraordinary item" when describing the costs or lost business, the ruling does not prevent them from breaking out all the costs in the earnings release, including indirect costs.

And, since analysts will know that there are some clear direct costs included in the company's estimated cost of the attack, he said they'll have no choice but to accept the entire amount, rather than forcing companies to justify that indirect costs are a real and unique effect of the attack.

"I think the analysts will now exclude more stuff than they would have otherwise," Hill said. "If I'm faced with all or none, I'm going to say all. If it's broken out, I'm going to be more reluctant to exclude the indirect costs."

But Timothy Lucas, chairman of the Emerging Issues Task Force (EITF) for FASB, said he believes there would have been these questions even if there had been an extraordinary item ruling because even some of the direct impact of the attack could not have been included in an extraordinary item charge.

"The extraordinary item treatment could never hope to capture the full event," he said. "The airlines lost three days of revenue, but lost revenue is not a cost that can be included in an extraordinary item, so the airlines would have had to break that out. We were not going to accomplish anything useful by having extraordinary item treatment of this event."

The EITF drafted a conclusion last week that detailed steps on how companies should begin to account for the financial toll of the attacks as extraordinary items, and was leaning toward allowing many of those direct costs to be considered an extraordinary event.

But trying to work out the details became so complicated that Lucas said it decided it couldn't find a solution that would be clear and consistent, which is what is needed for such a ruling to be useful.

"The EITF also recognized that it would be very difficult to separate direct effects from indirect in a consistent way," said the board's statement. "The members of EITF recognized that applying existing guidance to this event and identifying losses (and gains) that should be classified as extraordinary was very difficult and reasonable people could come to very different answers. After considerable efforts over the last two weeks to clarify the issue, the EITF concluded that the best way to achieve the objective would be to not use the classification for any of the effects of these particular events."

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The board said the overall impact of the attack was so great that trying to separate it into a specific line item would also cause more problems and disagreements, and underestimate the overall impact of the event.

"Any approach to extraordinary item accounting would include only a part, perhaps a relatively small part, of the real effect," said the board's statement. "The EITF concluded that showing part of the effect as an 'extraordinary item' would hinder, rather than help, effective communication."

The 13-member group concluded that the incidents were not "extraordinary" for insurance companies, as their business involves underwriting such events as the 1993 bombings at the World Trade Center, according to Lucas. That raised problems and questions of preventing one sector from using extraordinary items, but not others.

Not all big one-time events at companies are treated as extraordinary items. Earlier this year Ford Motor Co. (F: down $0.11 to $17.24, Research, Estimates)  announced it would replace Firestone Wilderness AT tires on all its vehicles, which it said cost it $2.1 billion, or about $1.15 a share. But while the event was unique, it counted against its ongoing operations, and plunged the company into the red for the third quarter.

Earthquakes in cities prone to quakes, such as San Francisco, are not considered extraordinary items, while an earthquake in the Midwest would be considered an extraordinary event. graphic

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