0901DF#2 V1 DRAFT
EITF Issue No. 01-10
Title: Accounting for the Impact of the Terrorist Attacks of September 11, 2001
Dates Discussed: September 20 and 28, 2001
References: FASB Statement No. 5, Accounting for Contingencies
FASB Statement No 88, Employers’ Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits
FASB Statement No. 109, Accounting for Income Taxes
FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of
FASB Statement No. 142, Goodwill and Other Intangible Assets
FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss
FASB Interpretation No. 30, Accounting for Involuntary Conversions of
Nonmonetary Assets to Monetary Assets
FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts
FASB Concepts Statement No. 5, Recognition and Measurement in Financial
Statements of Business Enterprises
FASB Concepts Statement No. 6, Elements of Financial Statements
APB Opinion No. 17, Intangible Assets
APB Opinion No. 18, The Equity Method of Accounting for Investments in
Common Stock
APB Opinion No. 20, Accounting Changes
APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions
AICPA Statement of Position No. 94-6, Risks and Uncertainties
AICPA Statement of Position No. 96-1, Environmental Remediation Liabilities
AICPA Accounting Interpretation, Reporting the Results of Operations:
Accounting Interpretations of APB Opinion No. 30
SEC Staff Accounting Bulletin No. 67, Income Statement Presentation of
Restructuring Charges
SEC Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges
September 20 and 28, 2001 EITF Meeting Minutes, p. 1 Issue No. 01-10
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Introduction
1. The terrorist attacks on September 11, 2001 (the September 11 events), resulted in a
tremendous loss of life and property. Secondarily, those events resulted in the interruption of the
business activities of many entities, business losses, and overall disruption of the U.S. economy
at many levels.
2. In the past, businesses have incurred losses as the result of catastrophes such as earthquakes,
hurricanes, and even other terrorist attacks. However, the September 11 events are
unprecedented in the United States in terms of the magnitude of the losses incurred and the
number of entities affected. In fact, the September 11 events were so alarming that the U.S.
Secretary of Transportation issued a Federal ground stop order that closed the U.S. air travel
system for over 24 hours. Those events are of a type not reasonably expected to recur in the
foreseeable future. This Issue provides accounting and disclosure guidance for losses incurred as
a direct result of the September 11 events and related insurance recoveries.
Issues
3. The issues are:
Issue 1—How the loss(es) resulting from the September 11 events should be classified in the
statement of operations.
Issue 2(a)—When asset impairment losses resulting from the September 11 events should be
recognized.
Issue 2(b)—When liabilities for other losses or costs resulting from the September 11 events
should be recognized.
Issue 3—What disclosures should be made in the footnotes to the financial statements regarding
the impact of the September 11 events.
Issue 4—How insurance recoveries resulting from the September 11 events should be classified
in the statement of operations and when those recoveries should be recognized.
EITF Discussion
4. The Task Force observed that the consensuses reached on this Issue are limited to the
September 11 events and should not be applied by analogy in other cases. Moreover, the Task
Force emphasized that not all catastrophes, even other terrorist attacks, should be classified in the
manner described herein.
5. On Issue 1, the Task Force reached a consensus that, except for costs incurred by insurers
and reinsurers to pay policyholders' claims as a result of the September 11 events, losses or costs
that are a direct result of the September 11 events should be classified as extraordinary in the
statement of operations. The Task Force observed that costs incurred by insurers and reinsurers
to pay policyholders' claims should be reported as part of income from continuing operations.
The Task Force observed further that if those costs meet the criteria in paragraph 26 of Opinion
September 20 and 28, 2001 EITF Meeting Minutes, p. 2 Issue No. 01-10
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30, those costs should be reported as a separate unusual item in income from continuing
operations and the disclosures described in paragraph 26 of Opinion 30 should be made.
6. The Task Force discussed the meaning of a direct result of as it is used in paragraph 5.
While acknowledging that preparers of financial statements must apply judgment and consider
specific facts and circumstances, the Task Force observed that, with the passage of time
(subsequent to September 11), it becomes less likely that losses or costs incurred by an entity are
a direct result of the September 11 events. For example, a restructuring plan announced by an
airline or airline-related enterprise within a month after September 11 would be much more
likely to be a direct result of the September 11 events than a restructuring plan announced by
such an entity more than one month after September 11. The Task Force further observed that
entities should not report as an extraordinary item any of the costs of a restructuring plan
announced after September 11 that had been contemplated prior to September 11. The Task
Force also observed that certain losses are not sufficiently linked to the September 11 events to
warrant classification as extraordinary. For example, an entity that provides an allowance for
specific trade receivables considered uncollectible due to an economic slowdown should not
classify that bad debt expense as an extraordinary item, even if the slowing economy is partly
attributable to the September 11 events. Exhibit 01-10B provides examples further illustrating
this concept and the types of costs or losses that may be a direct result of the September 11
events. Exhibit 01-10A provides a list of various losses or costs and guidance to be used in
determining whether those losses or costs should be classified as an extraordinary item in the
entity's statement of operations.
7. On Issue 2(a), the Task Force observed that Appendix B of Statement 121 includes a table
listing all of the existing FASB or APB authoritative literature that provides guidance relating to
impairment of assets and disposal of assets. The Task Force reached a consensus that the
guidance in that literature should be used to determine when an asset impairment loss resulting
from the September 11 events should be recognized and how that impairment loss should be
measured.
8. On Issue 2(b), the Task Force reached a consensus that liabilities for losses and other costs
should be recognized when the recognition criteria in paragraph 63 of Concepts Statement 5 have
been met. That is, those liabilities should be recognized when:
a. The item meets the definition of a liability. Paragraph 35 of Concepts Statement 6 defines
liabilities as "probable future sacrifices of economic benefits arising from present
obligations of a particular entity to transfer assets or provide services to other entities in the
future as a result of past transactions or events" (footnote references omitted).
b. The liability can be measured with sufficient reliability.
c. The information about the liability is capable of making a difference in user decisions.
d. The information about the liability is representationally faithful, verifiable, and neutral.
The Task Force further observed that the provisions of Statement 5 and other applicable
literature (including Interpretation 14) should be followed in determining when to recognize
losses incurred. The Task Force noted that under that literature, many of the losses and costs that
September 20 and 28, 2001 EITF Meeting Minutes, p. 3 Issue No. 01-10
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entities expect to incur as a direct result of the September 11 events will not qualify for
immediate recognition as a liability. For example, the costs of restoring a facility to a condition
suitable for occupancy should be recognized as the restoration efforts occur. Thus, the fact that
an entity intends to incur costs as a result of the September 11 events (or may even be compelled
to incur those costs to stay in business) does not necessarily mean that those costs should be
immediately recognized as a liability. The Task Force noted that paragraph 25 of Opinion 30
permits classification as an extraordinary item of losses or costs that are recognized over multiple
reporting periods. The table in Exhibit 01-10A provides additional guidance on when to
recognize losses incurred.
9. On Issue 3, the Task Force reached a consensus that entities should follow the guidance set
forth in paragraphs 11 and 26 of Opinion 30 pertaining to presentation and disclosure of
extraordinary and unusual items, respectively. Additionally, entities recognizing losses or costs
as extraordinary items pursuant to this Issue should, at a minimum, disclose the following
information in the footnotes to the financial statements:
a. The nature and amounts of losses incurred and the amount of insurance recoveries (if any)
comprising the amount presented as an extraordinary item in the statement of operations.
(Exhibit 01-10A may be useful to an entity in identifying the nature of the losses incurred
that should be disclosed.)
b. A description of contingencies resulting from the September 11 events 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 term1 (for example, future losses or probable future
insurance recoveries). The expected classification of those contingencies in the statement of
operations when and if recognized should also be disclosed.
c. A rollforward of liabilities recognized as a direct result of the events of September 11, 2001,
including the balances at the beginning of the period, costs or losses incurred, payments
made, adjustments to the liability balances due to changes in estimates or other factors, and
any other form of settlement or extinguishment of those liabilities.
d. Applicable disclosures pursuant to SOP 94-6.
The Task Force observed that the above disclosure requirements are intended to supplement
relevant disclosures required by existing authoritative literature and are important to the
transparency of the financial statements because of the level of judgment needed to determine
whether a cost or loss is a direct result of the September 11 events and, therefore, an
extraordinary item. For example, the disclosures required by EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)," would also need to be made for any
restructuring costs that are classified as an extraordinary item under the guidance in this Issue.
The SEC Observer reminded registrants of the requirements to provide disclosures identified in
Item 303 (Management’s Discussion and Analysis) of Regulations S-K and S-B. The SEC
Observer also reminded registrants of the financial statement schedule requirements of
Regulation S-X and the disclosures discussed in SAB 100.
1
The meaning of the term near term as used in this Issue is the same as the meaning of that term in SOP 94-6.
September 20 and 28, 2001 EITF Meeting Minutes, p. 4 Issue No. 01-10
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10. On Issue 4, the Task Force noted that the guidance in paragraph 4 of Interpretation 30 states
that, "gain or loss resulting from an involuntary conversion of a nonmonetary asset to monetary
assets shall be classified in accordance with the provisions of APB Opinion No. 30…." In that
regard, the Task Force observed that any insurance recoveries resulting from losses incurred as a
direct result of the September 11 events should be classified in a manner consistent with the
related loss(es). Further, the Task Force reached a consensus that for entities with losses that are
a direct result of the September 11 events, the entire amount of insurance recoveries under
business interruption insurance policies should be classified as an extraordinary item in the
statement of operations due to the impracticability of determining the amount of those recoveries
that relate to losses or costs included in income from continuing operations.
11. With respect to the timing of recognition of insurance recoveries, the Task Force reached a
consensus that entities should follow the guidance in paragraphs 140 and 141 of SOP 96-1. That
guidance requires that an asset relating to the insurance recovery should be recognized only
when realization of the claim for recovery is deemed probable1 (as that term is used in Statement
5). In addition, that guidance requires that the amount of the potential recovery be measured at
fair value (which requires consideration of both transaction costs related to the receipt of the
recovery and the time value of money). However, the time value of money should not be
considered in the determination of the recorded amount of a potential recovery if (a) the liability
is not discounted and (b) the timing of the recovery is dependent on the timing of the payment of
the liability. The Task Force observed that in most circumstances, the point in time at which a
liability for a cost or loss is both probable and reasonably estimable will precede the point in
time at which any related insurance recovery is probable of realization. Finally, the Task Force
observed that any applicable disclosures in SOP 96-1 with respect to insurance recoveries should
also be made.
12. Additional recoveries or financial assistance may be available to certain entities through
government subsidies as a result of the September 11 events. The Task Force observed that the
specific form and nature of such recoveries are uncertain until legislation authorizing the
recoveries is passed and signed into law. Accordingly, the Task Force agreed to postpone further
discussion of the accounting for those arrangements until legislation authorizing the recoveries is
passed and signed into law and additional information regarding them is available.
Status
13. No further EITF discussion is planned.
1
In accordance with paragraph 140 of SOP 96-1, if the claim is the subject of litigation, a rebuttable presumption
exists that realization of the claim is not probable. In addition, the guidance in SOP 96-1 does not negate the
requirements of paragraph 17 of Statement 5 with respect to recognition of gain contingencies.
September 20 and 28, 2001 EITF Meeting Minutes, p. 5 Issue No. 01-10
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EXHIBIT 01-10A
Guidance For Use in Applying the Task Force Consensuses
The following table provides guidance in applying the Task Force consensuses. The timing of
recognition and classification in this Exhibit apply only to the losses or costs that are a direct
result of the September 11 events. (Refer to paragraphs 4 and 5 of this Issue for discussion of a
direct result of.) This Exhibit is not intended to be all-inclusive with regard to the types of losses
or costs that might be incurred as a direct result of the September 11 events.
Timing of Classification as
Situation Recognition2 Extraodinary?
Assets (impairment and so forth):
1. Physical destruction of property,
including property, plant and equipment,
and inventory, capital lease assets of
lessees and assets of lessors subject to
operating leases and sales-type, direct
financing and leveraged leases I Yes
2. Impairment of property, equipment and
identifiable intangible assets (and
allocable goodwill) due to reasons other
than physical destruction (including
additional declines in fair value of
property or equipment held-for-sale) I Yes
3. Impairment of goodwill or identifiable
intangible assets pursuant to Statement
142 (if adopted) or Opinion 17 I Yes
4. Specific3 receivables, loans, and
advances deemed uncollectible I Yes
5. Equity method investments and
investments in debt and equity securities:
-Decline in market value of securities NST No
-Impairment due to defaults (for debt
securities) and/or bankruptcy (for equity
securities) I Yes
6. Increases to deferred tax asset valuation
allowances NST No
7. Depreciation expense on unusable
facilities and equipment AI Yes
2
Timing of recognition as indicated in the table assumes that the amount is estimable.
3
The Task Force concluded that general provisions or allowances for losses on receivables that are measured in
accordance with Statement 5 should be classified as part of income from continuing operations since such expenses
cannot be shown to be a direct result of the September 11 events.
September 20 and 28, 2001 EITF Meeting Minutes, p. 6 Issue No. 01-10
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Timing of Classification as
Situation Recognition Extraodinary?
Assets (impairment and so forth)
(continued):
8. Depreciation expense on voluntarily
idled facilities and equipment NST No
Losses and Costs:
9. Required lease payments on unusable4
facilities and equipment I Yes
10. Required lease payments on idled
facilities and equipment ? No
11. Losses under financial guarantee
contracts I Yes
12. Interest expense on debt NST No
13. Capitalized cost to rebuild physical
structures NST No
14. Cost to recreate lost data AI Yes
15. Cost of facility clean up and removal
of damaged/destroyed facilities (debris),
including allocable personnel costs AI Yes
16. Restructuring costs recognized under
Issue 94-3 I Yes
17. Obligations arising pursuant to SOP
96-1 I Yes
18. Costs associated with relocating to
new facilities from unusable facilities AI Yes
19. Cost of aircraft storage while the
aircraft is temporarily idled NST No
20. Legal settlements and unfavorable
outcomes of litigation I Yes
21. Penalties and other fees incurred due
to cancellation of firmly committed
executory contracts I Yes
4
Unusable refers to facilities or equipment, as applicable, that cannot be used due to physical damage or constraints
imposed by government or other authoritative bodies. Unusable, in this context, does not refer to an asset that is idle
due to a reduction in demand for goods or services. Examples illustrating the concept of "unusable" are provided in
Exhibit 01-10B.
September 20 and 28, 2001 EITF Meeting Minutes, p. 7 Issue No. 01-10
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Timing of Classification as
Situation Recognition Extraordinary?
Losses and Costs (continued):
22. Payment of salaries and benefits of
idled employees while operations are
temporarily ceased due to unusable
facilities AI Yes
23. Cost, to the extent identifiable5, of
providing employee benefit programs,
including counseling programs and travel
expenses to employees’ family members AI Yes
24. Increased medical expenses, including
workers' compensation expense, to the
extent identifiable5 AI Yes
25. Pension or OPEB curtailment or
settlement gains and losses pursuant to
Statement 88 or Statement 106 I Yes
26. Cost of time-off for employees
relating to emotional recovery AI Yes
27. Cost to implement new security
measures both voluntarily undertaken and
required by regulators or others NST No
28. Impact of employees called to active
military service NST No
29. Increased insurance premiums NST No
30. Operating lease payments on
temporary replacement facilities and
equipment6 NST No
31. Operating lease payments on
permanent replacement facilities and
equipment6 NST No
32. Charitable contributions to support
relief and rescue efforts NST No
5
Certain entities may establish one-time programs or benefits for employees relating to the events of September 11
and other entities may provide related benefits through existing programs. The Task Force observed that the
identification of the costs of benefits that are a direct result of the September 11 events will likely be more difficult
if those costs are incurred under an existing program.
6
The Task Force concluded that the cost of leased replacement facilities or equipment should be classified as part of
income from continuing operations regardless of whether there are changes in the cost, square footage or other
capacity of the leases, or other assets involved.
September 20 and 28, 2001 EITF Meeting Minutes, p. 8 Issue No. 01-10
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Timing of Classification as
Situation Recognition Extraordinary?
Other:
33. Loss of revenue due to business
interruption NST No
34. Penalties and other fees earned due to
cancellation of firmly committed
executory contracts NST No
35. Business interruption and key man life
insurance recoveries AI Yes
I- Immediate recognition
AI − As services are performed or over related period.
NST − No special accounting treatment.
September 20 and 28, 2001 EITF Meeting Minutes, p. 9 Issue No. 01-10
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EXHIBIT 01-10B
EXAMPLES
Example 1 – Penalties Paid on Cancellation of Firmly Committed Executory Contracts
As a direct result of the September 11 events, Airline A cancels a purchase order (issued prior to
September 11, 2001) submitted under a firmly committed executory contract with an airplane
manufacturer, Company B. In accordance with the terms of that executory contract, Airline A is
required to pay a cancellation penalty of $100,000. Company B subsequently cancels a purchase
order submitted under a firmly committed executory contract with its parts supplier, Company C.
Company B is required to pay a cancellation penalty of $50,000 under the terms of that
executory contract. Prior to September 30, 2001, as a result of the cancellation by Company B,
Company C cancels a purchase order submitted under a firmly committed executory contract
with its raw materials supplier, Company D. Company C is required to pay a cancellation
penalty of $60,000 under the terms of that executory contract.
Evaluation:
Because the purchase order cancellations were a direct result of the September 11 events, the
cancellation penalties paid by Airline A, Company B, and Company C would be classified as
extraordinary items in their statements of operations. A liability for those penalties would be
recognized at the date of cancellation. However, the cancellation fees earned by Company B,
Company C, and Company D would be classified as part of income from continuing operations
when recognized in their statements of operations. The fact that the contract cancellation by
Company C occurs prior to September 30, 2001, and the nature of Company C's business (that is,
one that is directly dependent on orders of aircraft parts), lead to a reasonable conclusion that the
cancellation is directly related to the September 11 events. However, if that cancellation had
occurred after a greater passage of time (for example, in December, 2001), a conclusion that the
cancellation is directly related to the September 11 events would likely not be appropriate or
supportable.
Example 2 – Decline in Value of Marketable Securities
Company A holds an investment in common stock of ABC Insurance Co. (a major reinsurer) that
is accounted for as available-for-sale under Statement 115. On September 10, 2001 the carrying
amount of the investment is $110,000 (its original cost was $102,000). When the market reopens
after September 11, 2001, ABC Co. stock declines sharply. On September 17, 2001, Company
A sells its investment in ABC Co. for $80,000.
Evaluation:
Company A would record a realized loss of $22,000 in ordinary income as a result of the
disposition of ABC Co. stock. The Task Force concluded that although the change in the fair
value of an investment security may have been affected by the September 11 events, given the
September 20 and 28, 2001 EITF Meeting Minutes, p. 10 Issue No. 01-10
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nature of market factors that influence the fair value of securities, the decline in fair value of a
security cannot be sufficiently attributed to the September 11 events. Therefore, the Task Force
concluded that no portion of a realized gain or loss (or, in other fact patterns, an other-than-
temporary impairment) on an investment security due to a decline in market value should be
classified as an extraordinary item unless the decline in market value occurred due to bankruptcy
or default of the company that is a direct result of the September 11 events.
Example 3 – Impairment of Equipment (Extraordinary)
Company B has a plant that manufactures airplane sub-components. For purposes of applying
Statement 121, Company B views the plant as a single asset group. Company B's management
believes that the September 11 events and related expected order cancellations represent a
significant adverse change in the business climate that may affect the value of that asset group
and, therefore, a test for impairment under Statement 121 is required. Prior to September 11,
there were no impairment indicators that should have caused Company B to perform an
impairment test. The impairment test results are as follows:
Aggregate carrying amount: $30 million (including $2 million of allocated goodwill)
Sum of undiscounted future cash flows: $27.5 million
Aggregate fair value: $18 million.
Evaluation:
Company B would record an impairment of $12 million as an extraordinary item in the statement
of operations for reporting periods that include September 11, 2001. A decline in future cash
flows that is directly attributable to the decline in air travel caused by the September 11 events
would lead to a reasonable conclusion that the impairment is directly related to those events.
Further, even if there was not a demonstrable decline in cash flows resulting from those events,
as long as it is clear that an impairment test was not required prior to September 11, and the test
performed after that date (that was triggered by those events) indicates an impairment,
classification as an extraordinary item would be appropriate. If applicable, goodwill should be
included in the asset grouping pursuant to the requirements of paragraph 12 of Statement 121.
Any impairment of goodwill would also be classified as an extraordinary item in the statement of
operations.7
Example 4 – Impairment of Equipment (Not Extraordinary)
Company C has a plant that manufactures automobile components. For purposes of applying
Statement 121, Company C views the plant as a single asset group. The economic climate has
been deteriorating in recent months, with auto sales (and parts orders) declining. In addition, the
demand for autos and auto components is expected to further decline following the September 11
7
This is also true for goodwill impairments pursuant to the requirements of Opinion 17 or Statement 142 that are a
direct result of the September 11 events.
September 20 and 28, 2001 EITF Meeting Minutes, p. 11 Issue No. 01-10
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events. In the reporting period containing September 11, 2001, management concludes that an
impairment test under Statement 121 is required. The impairment test results are as follows:
Aggregate carrying amount: $100 million
Sum of undiscounted future cash flows: $80 million
Aggregate fair value: $68 million.
Evaluation:
Company C would record an impairment of $32 million as part of income from continuing
operations (not an extraordinary item) in the statement of operations for reporting periods that
include September 11, 2001. It would not be appropriate to classify the impairment as an
extraordinary item because the general deterioration in the business climate that led to the
impairment evaluation is not directly related to the September 11 events. As indicated above, the
economic climate had been deteriorating in recent months prior to September 11. That fact
would have required a test for impairment prior to September 11 pursuant to paragraph 5 of
Statement 121. Goodwill may have been included in the asset grouping pursuant to the
requirements of paragraph 12 of Statement 121. If so, any impairment of goodwill would not be
classified as extraordinary.
Example 5 – Loss on Loans
Bank A has a loan to Oil Trading Company B located in Texas and a loan to Brokerage House C
located in Connecticut. Oil Trading Company B had contracts that locked in the price of its oil
sales over the next three years; however, the cost to purchase the oil to be sold under those
contracts was not similarly locked in. Expected increases in oil prices after September 11, 2001,
will have a significant adverse effect on Oil Trading Company B operating cash flows, and, as a
result, Bank A determines that its loan to Oil Trading Company B is impaired under Statement
114. Bank A also determines that the loan to Brokerage House C is impaired under Statement
114 because the market value of Brokerage House C's investment portfolio (representing 85
percent of its assets) has decreased dramatically following September 11, 2001.
Evaluation:
Any loan loss calculated under Statement 114 related to Oil Trading Company B would be
included as part of income from continuing operations in Bank A's statement of operations. The
resulting loss is not a direct result of the September 11 events. Changes in oil prices cannot be
directly attributed to the September 11 events and the business practice of Oil Trading Company
B was only impacted by those events because of its risk management and business practices. For
similar reasons, any loan loss calculated under Statement 114 related to Brokerage House C
would be included as part of income from continuing operations in Bank A's statement of
operations.
September 20 and 28, 2001 EITF Meeting Minutes, p. 12 Issue No. 01-10
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Example 6 – Loss on Financial Guarantee Contract
ABC Finance Company has guaranteed debt issued by DEF Manufacturing Company. As a
direct result of the September 11 events, DEF Manufacturing Company declares bankruptcy and
defaults on its debt. In accordance with the financial guarantee contract, ABC Finance Company
must pay DEF's debt.
Evaluation:
ABC Finance Company would classify the loss from payment under the financial guarantee
contract as an extraordinary item in the statement of operations because DEF Manufacturing
Company's default on the debt is a direct result of the September 11 events.
Example 7 – Store Closings
Company Y owns and operates several small retail stores in downtown New York City. Because
of a decline in retail sales in lower Manhattan that is a direct result of the September 11 events,
Company Y decides to close several of those stores. Prior to the September 11 events, there
were no plans to close the stores and approved budgets for the stores demonstrated the expected
profitability for those stores. The management of Company Y announces its plan to close its
downtown store locations and terminate the employees who work in those stores prior to
September 30, 2001. The costs of closing the stores and the employee termination expenses
meet all of the criteria outlined in Issue 94-3 to be accrued as a liability in Company Y's financial
statements as of September 30, 2001.
Evaluation:
Company Y would accrue the expected costs related to its planned store closings for the period
ended September 30, 2001. Because the store closings were the direct result of the September 11
events, the restructuring charges would be classified as an extraordinary item in the statement of
operations. The fact that the store closings are announced by Company C prior to September 30,
2001, the nature of Company Y's business (that is, that it is directly dependent on economic
activity in the lower part of Manhattan) and the lack of any indication that a plan to close the
stores existed or was considered before September 11, lead to a reasonable conclusion that the
store closings are directly related to the September 11 events. However, if the store closings had
occurred much later (for example, in December, 2001), or if there was evidence that Company Y
was contemplating closure of those stores prior to September 11, a conclusion that the
cancellation is directly related to the September 11 events would likely not be appropriate or
supportable.
Example 8 – Employee Severance
As a direct result of the September 11 events, a significant decline in the volume of air travel is
expected for the foreseeable future. As a result, Airline X has decided to reduce its workforce by
1,000 employees and announces its plan to lay off those employees prior to September 30, 2001.
September 20 and 28, 2001 EITF Meeting Minutes, p. 13 Issue No. 01-10
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Company A manufactures airplanes. Due to those expectations of reduced air travel, Company
A expects a significant reduction in the demand for airplanes and airplane parts for the
foreseeable future. As a result, Company A decides to lay off its entire Smalltown production
plant workforce of 500 people. Company A announces the plan prior to December 31, 2001.
TheatreCo operates a chain of movie theatres, including a movie theatre in Smalltown. As a
result of the reduced economic activity in Smalltown, TheatreCo decides to close its Smalltown
theatre and announces its plan to lay off its Smalltown employees prior to March 31, 2002. All
of the plans meet the criteria outlined in Issue 94-3 to be accrued as a liability in the period the
plan is announced.
Evaluation:
Assuming there is no evidence to suggest that employee layoffs at either Airline X or Company
A had been contemplated prior to September 11, the timing of the announcements and the nature
of the operations of Airline X and Company A lead to a reasonable conclusion that the employee
terminations are a direct result of the September 11 events. Consequently, Airline X and
Company A would classify their employee restructuring charges as extraordinary items in their
statements of operations. However, TheatreCo's termination of employees is not directly
attributable to the September 11 events due to the fact that TheatreCo's customers included
residents of Smalltown that were not employees of Company A. (The length of time subsequent
to September 11 that the plan is announced also reduces the likelihood that the restructuring is a
direct result of the September 11 events.) Therefore, TheatreCo's restructuring cannot be shown
to be a direct result of the September 11 events. Accordingly, TheatreCo would not classify its
restructuring charges as an extraordinary item in its statement of operations.
Example 9 – Payments of Salaries and Employee Benefits While Operations are
Temporarily Suspended
As a direct result of the September 11 events, Company X closes its office for the day and
communicates to its employees a message to "leave work for the afternoon and go home to be
with family and friends."
Evaluation:
Because the time off was a direct result of the September 11 events, those salaries and benefits
paid to employees (for the period of time the employees were idled) by Company X would be
classified as an extraordinary item in the statement of operations.
Example 10 – Payments of Salaries and Employee Benefits While Operations are
Temporarily Suspended
As a direct result of the September 11 events, Company Y's office building has been damaged
and closed indefinitely as unusable. Computers, papers, and so forth are in the building and are
not retrievable at the present time due to restrictions imposed by the New York City
September 20 and 28, 2001 EITF Meeting Minutes, p. 14 Issue No. 01-10
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Government. As a result, 200 of Company Y's 500 employees are idle until documents and
computers can be retrieved and alternative office space is located. The remaining 300 employees
of Company Y are able to work from alternative satellite office space or from their homes.
Company Y agrees to pay all of its employees (including those who are idle) and not charge their
vacation time for any down time they experience.
Evaluation:
Because the additional compensated absence is a direct result of the September 11 events, the
salaries of the 200 idle employees (for the period that Company Y estimates they will be unable
to work) would be classified as an extraordinary item in the statement of operations. The salaries
of all 500 of Company Y's employees would continue to be recognized as incurred (that is, no
acceleration of compensation expense would be appropriate for the 200 idled employees).
Example 11 – Payments of Salaries and Employee Benefits While Operations are
Temporarily Suspended
On September 12, 2001, Company Z receives a bomb threat. Company Z evacuates its building
and tells its employees to go home for the day.
Evaluation:
The bomb scare on September 12, 2001 is an event separate from the September 11 events.
Because the time off was not a direct result of the September 11 events, the salaries of employees
paid by Company Z would be classified as part of income from continuing operations in the
statement of operations. Likewise, other costs (such as employee counseling) related to bomb
threats would be classified as part of income from continuing operations in the statement of
operations.
Example 12 - Medical Self-Insurance
Company A has a significant number of employees that were injured and in need of medical
attention as a direct result of the September 11 events. Company A self-insures for employee
medical benefits and utilizes a stop-loss insurance policy for incurred covered medical costs that
exceed a specified amount. The expected incremental cost to Company A for those medical
claims arising from injuries sustained in the September 11 events totals $2 million, $1.7 million
in excess of Company A's medical claims accrual as of September 10, 2001. The stop-loss
insurance policy covers any costs that might exceed the $2 million total.
Evaluation:
Because the incremental self-insured medical costs are a direct result of the September 11 events,
Company A should classify the $1.7 million expense as an extraordinary item in its income
statement for periods that include September 11, 2001. Any increase in the future cost of
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Company A's stop-loss medical insurance policy should be recognized as an operating expense
in the future periods of coverage and should not be accrued as of September 2001. Consistent
with the guidance in SOP 96-1, liabilities of Company A for medical claims should not be netted
against receivables for insurance recoveries unless a right of setoff exists in accordance with the
criteria in Interpretation 39.
Example 13 - Self-Insured Employee Counseling Benefits
Company B has 3,000 employees based in high-rise urban office towers in California and has no
operations in the area directly affected by the September 11 events. Immediately following those
events, Company B experienced a significant increase in the number of employee calls to the
counseling "Hot Line" provided through a contract with a benefits provider to discuss anxiety
and concerns over the September 11 events. Based on discussions with the provider, Company
B has projected that the number of Hot Line calls related to counseling about those anxieties and
concerns over the period from September 11, 2001 through January 2002 will exceed the
contract allowance by 3,000, for an incremental cost of $75,000. After January 2002, the call
volume is expected to return to pre-September 11 levels.
Evaluation:
Because Company B's incremental Hot Line costs are directly related to the events of September
11, 2001, Company B should classify the $75,000 incremental expense as an extraordinary item
in its income statement. No liability should be recognized for the incremental expense until it is
incurred by Company B (which, depending on the specific billing arrangements, may be before it
is charged by the benefits provider).
Example 14 - Insured Employee Medical and Workers' Compensation Plans
Company C has a significant number of employees that were injured in the September 11 events
that are covered by its Workers' Compensation and general medical plans. Company C provides
its employees with those Workers' Compensation and medical benefits under contracts with an
insurance company. Company C does not expect to incur incremental medical or Workers'
Compensation costs beyond its contract policy premiums. Company C's insurer has notified the
company that because of the increase in the number and cost of those claims, the premiums for
its next annual policy period beginning January 1, 2002, will be $1 million greater than the
premiums for the prior policy year.
Evaluation:
Company C should recognize the increased insurance premiums as operating expenses during the
policy year. The Task Force concluded that increases in premiums for insurance coverage
provided by a third party insurer should be classified as part of income from continuing
operations because of difficulties in identifying the amount of the increase that is directly a result
of the September 11 events.
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Other Examples
Assets unavailable for use
Certain assets may not be available for use as a result of a government-imposed restriction or
some other limitation (for example, physical condition of property). If such restriction or other
limitation is imposed as a direct result of the September 11 events, the period costs of the asset
(for example, depreciation, amortization, or operating rentals) should be classified as an
extraordinary item in the statement of operations during the restriction or limitation period. For
example:
• Amortization on an airline company's gates, routes, and slots during the two-day period of
the FAA-mandated shutdown of U.S. airspace would be classified as an extraordinary item.
Likewise, depreciation and/or operating rentals on aircraft during that period would be
classified as an extraordinary item. Operating rentals (if applicable) would be accrued
immediately for the period the assets are unusable. However, depreciation and amortization
would not be accelerated and would be recognized in the same manner as though the assets
were usable.
• Depreciation and amortization (and operating rentals, if applicable) of an airline company's
gates, slots, ticket counters, computers, and other fixed assets at Reagan National Airport
while that airport is closed would be classified as an extraordinary item. Operating rentals
(if applicable) would be accrued immediately for the period the assets will be unusable.
However, depreciation and amortization would not be accelerated and would be recognized
in the same manner as though the assets were usable. In addition, depreciation (and
operating rentals, if applicable) of aircraft grounded at that airport (or any other airport) that
cannot be moved because of government restraints also would be classified as extraordinary.
However, once government restraints are lifted and the aircraft can be moved (even if they
are not), depreciation (and operating rentals, if applicable) associated with those aircraft
should be included in income from continuing operations.
• Depreciation and amortization (and operating rentals, if applicable) of an entity's office
space in a building that is adjacent to the incident area and is unusable because of a
government imposed restriction (for example, because the area is being used for the cleanup
effort or has been condemned) or because of the physical condition of the space would be
classified as an extraordinary item. Operating rentals (if applicable) would be accrued
immediately for the period the assets will be unusable. However, depreciation and
amortization would not be accelerated and would be recognized in the same manner as
though the assets were usable.
September 20 and 28, 2001 EITF Meeting Minutes, p. 17 Issue No. 01-10