As we have discussed in class, Hurricane Katrina was classified as “ordinary” for accounting purposes because hurricanes are not infrequent in Louisiana. The article points out that it is nearly impossible to classify something as infrequent noting that:
One accounting textbook terms them “so restrictive” that they can include only “such items as a single chemist who knew the secret formula for an enterprise’s mixing solution but was eaten by a tiger on a big game hunt or a plant facility that was smashed by a meteor.”
It does make sense to make it very difficult to classifying events as “extraordinary.” If it was easy, managers would likely manipulated financial statements as users often ignore “extraordinary items” as one time charges unlikely to be repeated.
While hurricanes to occur in Louisiana, I think that Katrina can still be classified as extraordinary due to what occurred after the hurricane passed. Katrina in itself, I will acknowledge, should not be classified as extraordinary. One can argue that it was the aftermath of Katrina, and the controversy surrounding the handling of the disaster, that can be classified as extraordinary. Perhaps the delays in clean up, and the demographic shift of people out of New Orleans, had a more long term financial effect on the city.
Accounting is a way for companies to manage financial transactions. FASB does not factor emotional distress or angst caused by event that has financial repercussions. I agree with Besian and Jon in that the response to Katrina’s flooding was extraordinary and the lasting affect on Louisiana’s residents. Had the situation been handled properly we would not think twice about the FASB definition of Katrina as “ordinary”. On paper, hurricanes and flooding are common to that part of the country. However, it is hard to forget all the media footage of what actually happened down there.
As unbelievable as this would’ve had sounded to most of us before taking this course, Katrina is an ordinary event. Of course one could argue that its effects on the local economy, and the entire country, are far from ordinary. On the other hand we are talking about financial statements prepared based on FASB rules and under those rules because New Orleans was always prone to severe flooding, the flooding brought about by Katrina are not extraordinary.
At the time of Katrina, and even to this day, there had been a lot of discussion regarding its handling by local and federal agencies. I believe most of us agree that relief operations could have been organized and managed much more effeciently thus lowering Katrina’s effects on the local economy. Unfortunately, I can’t see how one could meaningfully separate the effects of Katrina from the effects of its improper handling. I other words, I find it hard to believe that we could have measured the effects of Katrina from the effects of the delayed clean up and call the first ordinary and the second extraordinary. If there were no Katrina, there would be no clean costs, delayed or not.
My point is to merely illustrate the difficulty faced by businesses and FASB in trying to decide and figure out which events are ordinary and which extraordinary. Even though FASB’s definitions are pretty clear, I’m sure we will encounter such debates in the future.