For Accounting Purposes, Katrina Considered 'Ordinary'
If Hurricane Katrina and the Sept. 11, 2001 terrorist attacks are not considered “extraordinary” events, what are? Finance executives may be asking that question as accounting rule-setters have said that for financial reporting purposes, the devastation wrought by Katrina does not meet these two criteria: “infrequent in occurrence” and “unusual in nature.”
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Even though Katrina killed more than 600 people, wiped out homes and businesses and caused billions of dollars in damage, the hurricane would not meet the definition of an extraordinary event, according to the Financial Accounting Standards Board (FASB), the Wall Street Journal reported.
"As tragic as hurricanes and other natural disasters are for everyone affected, unfortunately every year many businesses across the country are affected by these types of events and thus they do not represent an unusual and infrequent occurrence to businesses or to insurers," wrote FASB spokesman Gerard Carney in a statement responding to a question, according to the Journal.
Extraordinary events are treated differently in financial reports. They are not included in the costs connected with normal business operations, and are listed on a separate line. These extraordinary items tend not to be considered by analysts when they are assessing a company's financial results.
The terrorist attacks did not meet the criteria, either. According to the Emerging Issues Task Force (EITF) of the FASB, “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.” The task force concluded that showing only part of the effect as extraordinary “would hinder, rather than help, effective communication.”
What kind of event would quality of extraordinary? The Mount St. Helens eruption in 1980 met the criteria, since the Washington volcano hadn't erupted in 130 years. Weyerhauser Co. was able to report a $36 million loss of timber, logs and building equipment as extraordinary in that case.
In the case of Katrina, hurricanes are common on the Gulf Coast and flooding is not unexpected in New Orleans, which is below sea level.
"There will be people who will argue or question whether this is extraordinary, but the bigger debates will be about the size of various losses," Doug Tanner, a partner in PricewaterhouseCoopers LLP's risk and quality group, told the Journal.
The FASB Emerging Issues Task Force is set to meet today. The issue may be discussed at that time, although it is not on listed on the published agenda.