In the wake of the September 11 terrorist attacks, many auditors and companies need answers to an unprecedented array of accounting and auditing questions. Certain industries, such as insurers, airlines, and businesses located in and near the World Trade Center area, have been directly affected economically. Other industries, such as hospitality and tourism, and other companies that depend on those directly affected have also suffered significant losses.
Clearly, for some companies the financial reporting and auditing considerations are dwarfed by other factors. As companies begin the process of recovering, the independent accountant can provide significant advice and support, particularly by identifying alternate working locations, recovering significant operating systems, and establishing future contingency plans. Involving the auditor in the recovery process will also help ensure proper compliance with the accounting and reporting requirements.
Accounting for the Event
The following are the most significant financial reporting questions regarding the events of September 11:
* How should losses or costs be classified in the income statement?
* When should asset impairment losses be recognized in the income statement?
* When should liabilities for other losses or costs be recognized on the balance sheet?
* What disclosures should be made in the footnotes to the financial statements?
* How should insurance recoveries be classified in the income statement and when should those recoveries be recognized?
In light of the magnitude of the losses incurred and the number of affected entities, the FASB's Emerging Issues Task Force (EITF) discussed these issues and provided guidance on how to report the financial effects. The guidance provided here applies solely to the financial reporting implications of September 11 and should not be applied by analogy to other situations (see accounting.rutgers.edu/ raw/fasb/index.html).
Losses and Costs Will Not Be Reported as Extraordinary Items. Although the losses directly related to September 11 may meet the definition of an extraordinary item, the EITF decided that they should not be reported as such. Rather, these costs should be included in operating income. (There were differing opinions on whether the losses met the extraordinary item criteria. Regardless of whether the criteria are met, however, none of the losses will be reported as such.) To the extent that the losses are considered either unusual or infrequently occurring, they should be reported as a separate item in income from continuing operations.
The task force members believe that although the losses and costs directly related to September 11 may meet the criteria to be considered extraordinary, presenting them as such in the income statement would not accomplish the primary objective of distinguishing them from other business operations-- to communicate the financial impact of the event itself. In contrast, the financial effects of September 11 are so farreaching that for companies to separate in a consistent manner the direct effects of the event from the associated indirect effects would be difficult. It would also be difficult to separate the effects of September 11 from the weakening economy that predated it. Therefore, trying to capture broad financial effects in one line on the income statement would not communicate the effects of the event.
Use existing guidance for asset impairment recognition. SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of, should be used to determine when to recognize asset impairment losses arising from September 11. That standard requires companies to review their long-lived assets and certain identifiable intangibles for impairment whenever events or changing circumstances indicate that the carrying amount of an asset may not be recoverable. …