In accounting terms, could the effects of the terrorist attacks of Sept. 11, 2001 be called an “extraordinary and unusual” item, appropriate for separate reporting on corporate income statements?
That question gave rise to identical ones concerning Hurricane Katrina (2005), the Japanese tsunami of 2011 and other climactic events. A source of annoyance to corporate financial statement preparers for years, the issue was resolved once and for all last Friday, when the Financial Accounting Standards Board issued an accounting standards update that eliminates the “extraordinary and unusual” classification from U.S. generally accepted accounting principles. Effective for fiscal years and interim periods within those fiscal years starting after December 15, 2015, “no public issuer will be required to separately classify, present, and disclose extraordinary events and transactions,” the update said.
But such a solution wasn’t on the table when standards setters were trying to grapple with the aftermath of 9/11. With the end of the third quarter of that year fast approaching, they felt they needed to quickly provide CFOs and other senior executives with guidance on how to report the results of a catastrophe that was unprecedented in terms of the number of companies affected and the magnitude of losses incurred.
“Because the importance of the accounting for the impact of those events pales in comparison to the gravity of the events themselves,” FASB’s Emerging Issues Task Force understood that addressing such issues would be a sensitive matter, according to an EITF report issued at the time. “However, the Task Force observed that timely accounting guidance would help companies in capturing data, planning how to communicate with investors, and so forth.”
At the time, corporate taxpayers were wondering if FASB would consider the event an extraordinary item – a determination that would have required them to go through burdensome calculations of the financial effects of 9/11and separately report them on their income statements. In meetings between Sept. 11 and Sept. 30, the standard setters came to what was for them an unusually swift decision: financial effects from the attacks should not be reported as the result of an extraordinary and unusual event.
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,” according to an Oct. 1, 2001 EITF press release.
In effect, that decision has kept most companies from using the classification. FASB research has unearthed only 30 instances of a company’s actually using an extraordinary item presentation in the last five years, and the research was based on XBRL findings involving more than 8,000 companies.
Even so, the requirement remained on the books, continuing to confuse corporate accountants about whether or not a given event was extraordinary and unusual. Some calls for elimination of the classification arose after Hurricane Katrina wreaked catastrophic damage in 2005 but was still not designated, for accounting purposes, as an extraordinary occurrence.
FASB’s new rules can be adopted early provided that the guidance is applied from the beginning of the fiscal year it’s adopted. Companies filing financials under the new rules won’t have to present an extraordinary and unusual item they consider material to their operations on a separate line below “income from continuing operations.”
Until now, companies have had to report the tax effects of the event. That has involved a complex calculation that includes allocating taxes related to the item within financial reporting periods. On a separate line below the tax effects of the item, companies have had to report the event’s effects on earnings per share.
Under the changed rules, companies will report the effects of such an event before tax effects, meaning the tax calculations will be gone. They will also have the option of reporting the results either on the face of the income statement on a line above “income from continuing operations” or in the footnotes to the financial statements. There will be no requirement to entitle the item “extraordinary.” Instead, the company can give the item a more specific name, such as “Effects from Hurricane Katrina.”
But one important thing will not change. Companies will still have to calculate and decide whether the effects of the event are “material” to the company’s finances, in case it might be questioned about why a widely known event isn’t reflected on the income statement. And standard setters have never provided a whole lot of guidance about what “material” really means.
Image by Dave Dugdale