NEWS RELEASE 10/1/01
FASB's Emerging Issues Task Force Decides
Against Extraordinary Treatment for Terrorist Attack
Costs
Norwalk, CT, October 1, 2001—In a
continuation of its September 20 meeting, the Emerging Issues Task
Force (EITF) of the Financial Accounting Standards Board (FASB)
convened September 28 and reached consensus on accounting issues
for the September 11 terrorist attacks. The agreed-upon-approach
differed from the tentative conclusions reached on September 20.
Specifically, the Task Force decided against use of an
extraordinary item treatment for losses incurred in connection with
the recent terrorist attacks.
In commenting on the consensus reached, EITF
Chairman Tim Lucas stated, "Because of the far-reaching effects of
the September 11 events, coupled with a weakening economy that
predated those events, it would be difficult to capture the
resulting economic effects in companies' financial statements. As
one example, the events impacted airlines in multiple ways. Air
carriers were unable to fly for two days, suffered the effects of
rerouting and initiated layoffs in anticipation of lower passenger
demand. No single line item can capture all of those effects. Other
companies representing a broad range of industries are experiencing
similar impacts."
Accounting principles provide for "extraordinary
item" treatment for gains and losses that meet certain technical
criteria. Gains and losses classified as extraordinary are shown on
the income statement net of tax effects and after a subtotal income
before extraordinary items. At the September 20 meeting, the Task
Force had tentatively concluded that some losses, directly
attributable to the events of September 11, should be shown as
extraordinary and undertook an effort to clarify how to separate
such losses from other financial results.
At last week's meeting the Task Force concluded
that, 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. The
EITF observed 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. Any approach to
extraordinary item accounting would include only a part—and
perhaps a relatively small part—of the real effect of those
tragic events. Readers of financial reports will be intensely
interested in understanding the whole impact of the events on each
company. The EITF concluded that showing part of the effect as an
"extraordinary item" would hinder, rather than help, effective
communication.
The EITF also recognized that it would be very
difficult to separate direct effects from indirect in a consistent
way. The primary objective of the FASB and the Task Force in
raising this issue was to provide financial statement preparers and
auditors with guidance that would be straightforward and
consistently applied. The members of EITF recognized that applying
existing guidance to this event and identifying losses (and gains)
that should be classified as extraordinary was very difficult and
reasonable people could come to very different answers. After
considerable efforts over the last two weeks to clarify the issue,
the EITF concluded that the best way to achieve the objective would
be to not use the classification for any of the effects of these
particular events. That approach also is consistent with the
broader objective of providing financial reports that communicate
effectively and clearly.
About the Emerging Issues Task Force
The EITF was formed in 1984 in response to
recommendations of the FASB's task force on timely financial
reporting guidance and an FASB Invitation to Comment on those
recommendations. EITF members are drawn primarily from public
accounting firms, but also include representatives of large
companies. The Chief Accountant of the Securities and Exchange
Commission regularly attends EITF meetings as an observer.
Composition of the EITF is designed to include persons in a
position to be aware of emerging issues before they become
widespread and before divergent practices regarding them become
entrenched.
If the group can reach consensus on an issue, that
consensus becomes part of generally accepted accounting principles
(GAAP). A consensus is defined as an agreement reached by at least
11 of the 13 task force members.
About the Financial Accounting Standards Board
Since 1973, the Financial Accounting Standards Board
has been the designated organization in the private sector for
establishing standards of financial accounting and reporting. Those
standards govern the preparation of financial reports and are
officially recognized as authoritative by the Securities and
Exchange Commission and the American Institute of Certified Public
Accountants. Such standards are essential to the efficient
functioning of the economy because investors, creditors, auditors,
and others rely heavily on credible, transparent, and comparable
financial information. Additional information about the FASB is
available on this website.
The Financial Accounting Standards Board . . .
Serving the investing public through
transparent information resulting from high-quality financial
reporting standards, developed in an independent, private sector,
open due process.
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