GAAP and IFRS

Katrina Was Not “Extraordinary”

Experts advise accountants not to classify Katrina-related expenses as extraordinary.
Stephen TaubSeptember 16, 2005

About 80 percent of New Orleans was flooded. Entire zip codes have been deemed uninhabitable. Hundreds were killed. Thousands were relocated. And insurance losses could top $60 billion.

However, from a financial reporting standpoint, Hurricane Katrina was not an “extraordinary” event, according to at least two of the most prominent accounting bodies.

The American Institute of Certified Public Accountants (AICPA) advised its members that because a hurricane is a natural disaster, “that is reasonably expected to reoccur,” the losses it causes should not be considered extraordinary from a bookkeeping perspective, said a Bloomberg report. This is significant, because extraordinary events are separated from the usual run-of-business expenses in financial reports, and are typically ignored or downplayed by investors when they judge the financial performance of a company.

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“There are people who say it’s the magnitude of what Hurricane Katrina did that was extraordinary,” AICPA director of accounting standards Daniel Noll told the wire service. “You can find accountants on the same block who will disagree on this guidance.”

So, what does it take for a natural disaster to be deemed extraordinary? An earthquake that strikes an area with no known fault line or documented history of quake activity, Noll told Bloomberg.

The Financial Accounting Standards Board (FASB) also considers Katrina “ordinary” for accounting purposes. Larry Smith, the chairman of FASB’s Emerging Issues Task Force, said on Wednesday that there were no plans to have the task force consider whether to label Katrina an extraordinary event, reported Bloomberg, citing board spokesman Gerard Carney.