Sheehan & Company - Bulletin - Articles: IMPACT OF RECENT TERRORIST ATTACKS ON BUSINESSES - Part II - Financial Reporting Treatment For Terrorist Attack Cost

For many of us, the tragic events of September 11 were a wake-up call to reassess all of our financial planning and insurance coverage. Watching the towers of the World Trade Center crumbling has caused many Americans to re-examine some aspects of their financial lives. You may be asking yourself, "What would happen to my family if that happened to me?" This leaves many of us wondering how to best protect our families in these uncertain times.

INTRODUCTION
As a result of the tragic events that occurred on September 11th, businesses' will, not only, have to evaluate the feasibility of implementing an emergency management program (Please see Sheehan & Company's November News fax, "Impact of Recent Terrorist Attacks on Businesses - Part I, Emergency Management - Are You Prepared?"), but they will also have to report and disclose the financial impact of the recent terrorist attacks. The impact of this disaster is astonishing, not only by the tremendous loss of life, but also by the economic repercussions that will be felt for many years. The unprecedented events of September 11th were so wide-ranging and had such a pervasive impact on U.S. businesses and the U.S. economy. Businesses are now faced with the challenge of providing meaningful financial information to the public reflecting changes precipitated by the recent events. Which leads us to the main issue - What should an entity do when they are impacted by events like those that occurred on September 11th? How will they report and disclose these changes on their financial statements?

OVERVIEW - REPORTING & DISCLOSURE
When an entity has incurred additional costs or losses as a result of the events of September 11th, it must determine proper financial reporting and disclosure procedures that are required in order to present the financial statements in accordance with generally accepted accounting principles. What are the correct financial reporting and disclosure procedures necessary in the case of a tragic event? It is the Emerging Issues Task Force's (EITF) job to determine how to report and disclose the effects of September 11th in the financial statements. The EITF is part of the Financial Accounting Standards Board (FASB), which reports on accounting issues dealing with the compliance of generally accepted accounting principles. Without the guidance of the EITF, many businesses and their accountants would be faced with individually answering those questions. The conclusions reached by the EITF will be helpful in achieving timely, useful financial reporting guidance and will avoid the need for each business to face these difficult issues on its own.

KEY ISSUES - REPORTING & DISCLOSURE
There are three key issues that the EITF focused on with regard to the financial reporting treatment of the terrorist attack costs. They are as follows:

1. How losses or costs caused by the events should be reported in the financial statements
It might be an entity's initial thought to segregate the losses and costs involved with these tragic events and make a separate line item on the financial statements. It was the Task Force's job to review this issue. They needed to determine whether to report the effects of September 11th, as an extraordinary item or as part of the normal income from continuing operations in the statement of operations. If reported as an extraordinary item, it would have a separate line item in income from continuing operations, either on the face of the statement of operations or in the footnotes to the financial statements. These events were an unusual and infrequent circumstance, which meets the criteria for reporting an extraordinary item. However, due to the impossibility of isolating and distinguishing the separate losses that are directly attributable to the September 11th events from those that are not, the Task Force ruled against the use of an extraordinary item. Therefore, the Task Force concluded that losses and costs resulting from the September 11th events should be classified as part of income and expenses from continuing operations in the statement of operations. They also concluded that it would better serve the financial statement users if these items were not reported as a separate line item on the financial statements as they might be deemed misleading. Users of financial information are interested in understanding the complete impact of the events on each business. This approach is consistent with the broader objective of providing investors and financial statement users with financial reports that are straightforward and; therefore, communicate the information effectively.

2. When losses or costs should be recognized
The EITF concluded that liabilities for losses or other costs should be recognized when the loss or costs are probable, can be measured with sufficient reliability, the information is capable of making a difference in user decisions, and the information is representational, faithful, verifiable, and neutral.

3. Whether other information about the economic effects of the events should be provided in the financial statements
At a minimum, all businesses should disclose a description of the nature and amounts of losses recognized as a result of the September 11th events, the amount of related insurance recoveries (if any) recognized, and a description of contingencies that have not yet been recognized in the financial statements but that are reasonably expected to impact the entity's financial statements in the near term.

CONCLUSION
Sheehan & Company was deeply touched by these tragic events, and would welcome any questions regarding the impact the recent terrorist attacks had on either your business or personal life. We can assist you with all of the necessary financial reporting and disclosure requirements resulting from the unprecedented events of September 11th. Sheehan & Company offers a full range of financial services to accommodate all your business and personal needs.