FASB: 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.

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