I know we touched on this a little on class when discussing how to create an income statement, but it still seems a little crazy that 9/11 is not deemed an extraordinary by accounting standards. While we deem those extraordinary items as infrequent and unusual (which 9/11 seems to be), the FASB’s final decision makes more sense when thinking from an accounting perspective. The real world and the accounting world are two separate things and that is important to remember.
The thing that made this article confusing is that the FASB’s Emerging Issues Task Force decided 9/11 was extraordinary and then a week later decided just the opposite. It really shows this is one of those easily debatable issues, which means no matter what FASB decided there were going to people on the other end that were going to be upset.
The quote from task-force member Dick Stock helped me to better understand the reasoning behind FASB’s change of heart. Mr. Stock said that 9/11 affected almost every company and created such a broad new economic landscape that, “it almost made it ordinary.” If most or all companies are going to have financial issues, everyone is going to be on a similar playing field so creating an extraordinary item line is not necessary. It’s hard to envision many, if any other scenarios where ALL companies are affected. This makes it harder as well because there is really no precedent to work off of.
The last paragraph is similar to what I thinking when I read the quote from Mr. Stock. Although 9/11 did affect our entire economy, it definitely had a much larger impact on some companies as opposed to others. We have no way of figuring out what that exact effect is (or more importantly what the company believes it is) and that means investors have to try and figure out individually what they believe the impact was.
The fact that FASB as decided that financial costs/losses resulting from the 9/11 terrorist attacks should not be reported on financial statements as extraordinary items goes down well with me and does not seem to upset me since I believe that FASB was right in doing so as expenses resulting from the terrorist attacks should be considered part of normal business operation, and not be considered as something as unusual and non recurring. Also , I believe that FASB must have feared that , managers would allocate losses not related to the attack, if this be considered as an extraordinary event.
Even though a week prior to this the board had reached the opposite conclusion and initiated efforts to clarify how to apply the guidelines by separating losses directly attributable to the disaster from other financial results, FASB’s task force (EITF) must have realized that it would be impossible for financial statement preparers to separate losses due to attacks from other financial results. Not only that ,FASB must have thought that this could lead to results that could be misleading and also the fact that different people could draw different conclusions from it.
A little explanation from the task force member Dick Stock further clarified things as Dick rightly put it, that these attacks affected almost each and every company and thus there was no reason for FASB to term these attacks as extraordinary since every company was now on the same page.
To end it, even though the board realized that these attacks were extraordinary in the dictionary sense of the word, it was right in not labelling the resulting costs and losses as extraordinary from a financial perspective.
The accounting term “extraordinary” still puzzles me. The article regarding Hurricane Katrina mentioned Mount St. Helens eruption in 1980 as an extraordinary event because such an eruption hadn’t occurred in 130 years. But what if it affected many businesses throughout the region? Would it then be considered almost “ordinary”?
The reason given for 9/11 was that it affected many businesses, thereby making it almost “ordinary”. Such reasoning gave room for debates. Perhaps a better reasoning would have been: due to prior attacks on WTC, such as the 1993 bomb, 9/11 cannot be categorized as “extraordinary”.