EITF's Reversal Recognizes Uncertainties.

The late September decision Force (EITF) of the Financial by the Emerging Issues Task Accounting Standards Board (FASB) to reverse a tentative decision covering the financial reporting implications resulting from the Sept. 11 terrorist acts was a surprise to many -- including some EITF members themselves.

Initially, the EITF, at a regularly scheduled board meeting on Sept. 20, proposed that many of the incremental losses attributable to the Sept. 11 events should be classified as extraordinary, and agreed on guidance as to what kinds of losses should be included. The Task Force also tentatively agreed on certain treatment for liabilities and related losses and content of footnote disclosures, and planned to create some illustrations and examples to give guidance.

Eight days later, the EITF, after lengthy debate, essentially reversed itself. By a unanimous vote, the 12 Task Force members (one seat is currently vacant) agreed to table the proposed guidance, a position that was unexpected by most, including chairman Timothy Lucas. "Frankly, my expectations going into the meeting on the 28th were that we would probably confirm that [initial] direction," he said in an interview.

Lucas explained that during the course of the 4-1/2 hour meeting and in-depth debate, the Task Force concluded that there should be no extraordinary treatment, basically for two reasons:

First, when working on various examples to illustrate what would qualify for extraordinary item treatment, Lucas says, "We came to the conclusion that no matter what we did, the extraordinary item would never be able to capture what really was the direct effect of this unprecedented event." For example, the major airlines, unable to fly for a couple of days in September, had no revenues during those days. "It's not possible, mechanically, to classify revenue you didn't receive as an extraordinary item," Lucas said. "Extraordinary items are subtracted out at the bottom of the income statement, and the revenue you didn't receive isn't in there." He added that companies are required to disclose the effects of the event, and could do that better in footnotes and in the management discussion and analysis (MD&A).

A second reason involves the use of resources and deciding how to identify which are and are not extraordinary costs -- a concern Lucas concedes is less important, but reflects why the issue was taken up by the Task Force. He said this issue revolves around eliminating the need for auditors and clients in conference rooms around the country to debate this concern. The Task Force recognized that it would be difficult to separate direct effects from indirect in a consistent way.

The primary objective of the FASB and EITF in raising this issue was to provide financial statement preparers and auditors with guidance that would be straightforward and easy to apply. The EITF recognized, however, that applying existing guidance to the Sept. 11 aftermath and identifying losses (and gains) that should be classified as extraordinary would be very difficult, and reasonable people could come to very different conclusions.

When EITF's decision was announced Oct. 1, it met mixed reviews. Speaking in the first days after the announcement, Lucas said critics had overlooked an important point, or had not yet seen the entire package: "This does not say, in any way, that you cannot or should not try to communicate the effects of this event." And, he added, "it doesn't say 'Everything's business as usual,' It does say you might have an APB 30 unusual item treatment, setting things out on a separate line; and it requires this be communicated in footnotes as to the overall effect." In essence, he added, "We're trying to communicate effectively with the best tools we have,"

Lucas added, "We did not make this decision on narrow technical grounds, We ultimately decided based on our perception that this communication device would only detract from the ability to communicate effectively about this event. Some commenters said, 'If this isn't extraordinary, what is?' We understand all those sentiments -- that's what made us reach the initial conclusions. But, if you think through the consequences, I'm convinced that where we ended up is better for financial reporting."

Complete and up-to-date EITF guidance can be found on the ASB's Web site at www.fasb.org.