Attacks not considered 'extraordinary' for business accounting

NEW YORK -- Imagine you're an airline CEO. For months, you've labored to contain the damage from a deflating economy. Then, the Sept. 11 terrorist attacks turned a corporate crisis into a catastrophe, resulting in losses you couldn't possibly have foreseen.

How do you tell your company's story without getting swamped by the bad news on the bottom line?

That's the quandary raised by a recent decision from accounting regulators, regarding the impact of the terrorist attacks. The ruling will test companies' abilities to tell their financial stories in coming weeks -- and the skills of investors trying to discern meaning in those accounts.

"Let's call it plain English," said Steven Lilien, who chairs the accounting department at New York's Baruch College. "That's where the effort should be concentrated.

"I'd hope they would lay it out in clear fashion that gives investors an opportunity to assess the impact and not give spin to it. I don't think, necessarily, we'll see that."

The decision last week by the Financial Accounting Standards Board has been much scrutinized and debated in business circles. FASB ruled that the attacks should not be classified as "extraordinary," meaning that companies will not be allowed to list attack-related losses in a separate line on their financial statements.

That may sound arcane. But it is a big deal for airlines, insurance firms, companies displaced by the attacks and other businesses whose profits were impacted drastically by the destruction and consumers' reaction to it.

Those losses are real enough. The question for companies and regulators was whether the costs should be listed separately, as a one-time event beyond the control of management, or whether they should be reported as an integral part of firms' performance.

With attack-related losses lumped in with other expenses, many companies' profits will fall seriously short of expectations, possibly scaring off investors.

FASB regulators initially sided, at least partly, with separating such expenses, noting that the attacks were clearly extraordinary events.

The problem was trying to decide precisely which costs were "extraordinary." With the economy shaky even before the attacks, a range of companies already had all sorts of problems. Where did those problems end and attack-specific losses begin?

"You really can't call the whole economic downturn extraordinary and we didn't really know how to draw those lines," said Tim Lucas, chairman of the FASB task force charged with figuring out a solution.

For example, Lucas said, airlines lost money paid to lease planes when all flights were grounded for two days, clearly a symptom of the attacks. But what about the revenues lost due to a frightened public, once the planes were back in the air? What about the cost of laying off thousands of workers? If those costs are extraordinary now, is that still the case if more layoffs are announced in a few months?

There really isn't a perfect accounting solution, Lucas acknowledges. On that, there's plenty of agreement.

"These events certainly were extraordinary," said Dan Noll, director of accounting standards for the American Institute of Certified Public Accountants. "It's one of these things where ... the devil is in the details."

Todd Thomson, chief financial officer for Citigroup Inc., was more blunt in a letter to FASB expressing dismay over a preliminary decision to classify airline costs as extraordinary but not his own company's insurance losses.

"If claims payments caused by these events do not qualify as extraordinary, we fail to understand what other events possibly would," Thomson wrote.

Citigroup says it lost between $100 million and $200 million when the attack forced the closing of the New York Stock Exchange and some of its bank branches. Insurance claims and other expenses could total $500 million, the company says.

Those costs could pare Citicorp's earnings, which were expected to exceed analysts' expectations by 2 cents a share for the third quarter, by as much as 14 cents a share. Such losses are anathema to most firms in a corporate culture focused on delivering earnings that meet or beat analysts' expectations.

Most major companies spin their earnings announcements to emphasize positive figures over bottom line weakness. Many firms have embraced "pro forma" earnings, based on hypothetical circumstances. Several have recently been caught manipulating figures, forcing them to restate earnings.

Regulators and accounting experts were concerned that if firms were able to classify expenses as extraordinary, they would use the line as an umbrella to cover all sorts of problems not directly related to the attacks.

Several accounting experts said they could not recall a single event that had been classified as "extraordinary" for a wide range of companies in the past, even disasters like hurricanes.

It's not clear yet how the FASB ruling will affect corporate reporting of financial performance.

Some experts are hopeful that companies will make extensive efforts, using footnotes and discussion and analysis by management, to clearly explain how they were impacted by the attacks.

"Every single company is going to make a good-faith effort to make sure people understand what happened," Lucas said.

Baruch College's Lilien has his doubts about such corporate candor and clarity. This earnings season, he said, will present a challenge to both investors and analysts to pick carefully through the numbers and information companies present and make carefully reasoned judgments about the firms' financial health.

Loads of companies will almost certainly try to dress up their performance with "pro forma" figures purporting to show how well they would've done had it not been for the attacks. But, in the long run, that may highlight the need for back-to-basics accounting clarity, said Robert Colson, editor-in-chief of The CPA Journal.

Such numbers could fuel "more focused demand and a more focused resolve to have there be some type of reconciliation to generally accepted accounting numbers," said Colson, of the New York State Society of Certified Public Accountants. "which, from my perspective, couldn't hurt anything."