Attacks Not ‘Extraordinary,’ Accounting Board Decrees
The Sept. 11 terrorist attacks were extraordinary events by most definitions, but not in the accounting world, where they will be considered just another part of doing business.
The Financial Accounting Standards Board, the profession’s governing body, has decided companies should report income or losses related to the Sept. 11 events as part of continuing operations, not as a one-time “extraordinary” event.
The board’s decision will further depress third-quarter earnings, with companies already gearing up to report the worst quarter in about a decade. It also could create an opening for companies to blame more on the attacks than is necessarily the case, obscuring other reasons for the tough quarter.
Wall Street typically measures corporate health by looking at operating earnings--profit before one-time charges for things such as restructurings and acquisitions. Companies now will have to lump into these earnings costs related to the attacks.
“Companies are free to tell the story about how this impacts them in the way they think is best,” said John Stewart, a member of the FASB task force that issued the decision. “We decided the extraordinary event was not the best way.”
The standards board said in a statement Monday that “the economic effects of the events were so extensive and pervasive that it would be impossible to capture them in any one financial statement line item.”
The 12-member FASB task force said the attacks were “an extraordinary event as ‘extraordinary’ is used by people in their everyday lives, but that investors wouldn’t be well served by having part of the impact presented as an extraordinary item and part of the impact presented elsewhere in the financial statement,” a board staff member said.
Accounting standards board members were expected to permit companies to write off losses as one-time events, and were debating which items could be classified that way. However, they reversed themselves Friday after deciding it would be too confusing for investors.
Already, some companies with only tenuous links to the terrorist attacks are blaming profit woes on the tragedies. For example, Florida-based supermarket chain Winn-Dixie Stores Inc., which has no stores in the New York area, cited “uncertainties” related to the attacks when it lowered its earnings outlook.
The accounting board’s decision applies only to official corporate reports filed with the Securities and Exchange Commission, not to what companies say in news releases.
Many companies, when they report their earnings over the next few weeks, are expected to cite the attacks as a reason for setbacks.
Companies will provide the official explanation for attack-related effects on their income statements in footnotes, the way it is usually done.
Calling an event extraordinary is permitted rarely under generally accepted accounting principles. In some cases, such as early retirement of debt, it is required. Other seemingly extraordinary events, such as hurricanes, do not qualify if they occur in storm-prone areas such as Florida.
The ruling could open the door to companies’ lumping together a number of items in their earnings statements and blaming them on the attack to obscure other reasons, said Chuck Hill, director of research at Thomson Financial/First Call.
“If they had been forced to take the obvious stuff and put it into an extraordinary item and just left the other questionable stuff, analysts could have been in a position to be more discerning,” Hill said.
“Now, if I only give you one number, your choice is either to exclude none of it or all of it,” he said.
