Associated Press
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 turn a corporate crisis into a catastrophe, resulting in losses you couldn’t possibly have foreseen.
How do you continue to woo investors without getting swamped by the bad news on the bottom line?
That’s the quandary raised by a recent decision by 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. The board 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 affected 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.
Regulators initially leaned toward 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 a task force charged with figuring out the board’s 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 acknowledged.
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