When publicly traded companies release financial statements they must conform to Generally Accepted Accounting Principles. 1 (GAAP. Pronounced GAP) In the US, GAAP is currently set by the Financial Accounting Standards Board. (FASB)
One of the requirements of GAAP is that companies must categorize their expenses as being from operations, or not. Companies would generally prefer to list large and infrequent items as not being from normal operations. Doing so allows them to list those expenses in a separate category, which analysts and investors often disregard when valuing the company. One such category is "Extraordinary Items." To qualify, an event must be both unusual and infrequent. The rules for such classifications are necessarily stringent. (To keep companies from classifying anything that happened to them that they didn't like as "Extraordinary".)
However, the FASB has often made decisions in this realm that, while technically justifiable, seem ill-advised. After the 9/11 attacks, the FASB released a tentative statement that the attacks were an extraordinary item. That decision was later reversed. While there is certainly a technically justifiable argument to support this decision (which I won't go into here), I did not believe it to be the correct one.
Now, comes word that Hurricane Katrina will also not be considered an extraordinary event.
NEW YORK (CNN/Money) -
Despite the extraordinary devastation wrought by Hurricane Katrina, corporations will not be able to exclude costs related to the hurricane when reporting their financial results, according to a published report.
In a statement to the Wall Street Journal, the
Financial Accounting Standards Board, which makes the accounting rules
for U.S. publicly traded companies, said "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."
This decision, apparently based on the fact that natural disasters, in general, are commonplace, seems another ill-advised decision. For one, it seems to discount the fact that while hurricane damage in that area is not unusual, the sheer scale of this hurricane would seem to place it in a class of its own.
Fortunately for me, I'm not one of those accountants who has to tell businesses destroyed by last weeks disaster that what happened to them was not an extraordinary event.
1 Many privately traded companies are also required, or choose voluntarily, to use GAAP.
Recent Comments