Reporting of the Losses Suffered from the Earthquake - Essay Example

Option #1 is to report it as an extraordinary loss separate from operations. And Option #2 is to report the loss in a continuing operation but treat it as a separate part of the income statement. These two options would require proper disclosure in our footnotes of the event. The reporting of extraordinary items (losses) has an advantage, that is, they are not included under normal operating income which will be construed by stakeholders and creditors as items that will not happen in the foreseeable future.

Hence, the event’s effects on net income are not in any way reflect the true status of the business operation since it is not a recurring event. According to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 225-20-45-2, “extraordinary items are events and transactions that are distinguished by their unusual and by the infrequency of their occurrence. Thus, both of the following criteria should be met to classify an event or transaction as an extraordinary item”.

CHHS has to decide whether the earthquake meets both criteria. Per FASB ASC 225-20-55-2 “An event or transaction of a type that occurs frequently in the environment in which the entity operates cannot, by definition, be considered as extraordinary, regardless of its financial effect.” On the other hand, FASB ASC 225-20-55-1 stated that “unusual nature is not established by the fact that an event or transaction is beyond the control of management”. Statistics gathered from Northern California Earthquake Data Center (NCEDC) showed that since 1969, there were about 99 earthquakes that shook the Bay Area with magnitudes of 5 or greater but only 3 have so far been recorded more than 6.7. With these statistics, it may be difficult to validate that earthquakes are infrequent and of a kind that would not be projected to happen in the foreseeable future.

Should we were to report the damage as an extraordinary item; it will appear under continuing operations as the net of tax of $16.5 million. Per FASB ASC 225-20-50-3 states that “The nature and financial effects of each event or transaction that is unusual in nature or occurs infrequently, but not both, shall be disclosed on the face of the income statement or, alternatively, in notes to the financial statements.” We can use this statement as our basis “to report losses under continuing operations but as separate component” according to Accounting Principles Board (APB) Opinion 30 paragraph 26.

Under this reporting method, stakeholders and creditors are prone to analyze that there is still a risk that an earthquake will happen again, but the chance is little. Should we report the damage under this option, we would include the full $27.5 million loss as a separate component in continuing operations. Stakeholders and creditors rely on the income statement very much, their decision is dependent on the report we will submit. I am therefore recommending Option #2, that is, to report the earthquake damages under continuing operations but as a separate income statement component.