Module 16 August 1990 John Doe Chief Financial Officer AB Important Controller RE: Recommendation for reporting of the damages suffered from the earthquake in the income statement for the year ended august 4, 1990 The San Francisco earthquake took place on October 17, 1989. It happened to cause widespread destruction across the city especially the emporium division of CHHS. It was powerful because it was magnitude 7.1 on the Richter scale thereby leading to losses totaling $27.5 million. It is necessary to note that income statements include extensively damaging occurrences like earthquakes as losses.
These losses are either detached from operations as extraordinary losses or included in long-term operations but reported as a separate item in the income statement. Such occurrences or losses as those caused by earthquakes are usually reported as unusual events and noted to be uncommon. Reporting such an event as an extraordinary loss has the advantage of investors and other stakeholders not interpreting the scenario as one that has a bearing on the future of the company. This is because it is not likely to occur again in the future.
It is therefore, crucial to analyze the geographical region of operation so as to determine if losses emanating from earthquakes can be termed as an extraordinary event (Accounting Principles Board Opinion No. 30 paragraph 20-22). Being beyond the management’s control is just one of the factors that make earthquakes extraordinary. Earthquakes however fail in the other criterion that requires them to be infrequent events. This is because California is a seismic active area and thus many earthquakes have occurred. It would therefore, not be recommendable that losses suffered in the event of an earthquake be reported as extraordinary. According to APB 30 paragraph 20, items such as earthquakes that do not seem to recur often in nature are supposed to be reported under continuing operations.
They should also be categorized as separate components. This earthquake loss, however, should be included under operations since it was not totally unexpected but should after this be termed as infrequent. This method will create an impression to investors and creditors that even though unpredictable the event is rare and that its recurrence should not be of much concern (Spiceland and Nelson 103).
In the short term, the earthquake and especially the resulting massive losses are unlikely to be experienced. Therefore, in continuing operations section, $27.5 million loss should be recorded separately. Since financial statements are meant to provide a preview of expected future outcomes, reporting the earthquake in such a way that it will seem not likely to occur again is quite a brilliant idea. This will ensure that the business still has the trust of both creditors and investors in the long term.
Though earthquakes are frequent in California, reporting the earthquake damages separately in continuing operations will be consistent with the APB opinion. This is because the earthquake’s magnitude was to a large extent incomparable to many in almost a century. This clearly indicates the rareness of this damage even if another is to occur in the near future (FASB 20). Works cited Accounting Principles Board Opinion. No. 30. 2010. Web. 25 Oct. 2011. Spiceland, Sepe, & Nelson. Intermediate Accounting. 6th ed. Irwin/McGraw-Hill. 2011. Print.