California

Date: 15 August 1990

To: John Doe

Chief Financial Officer

From: Brandon Miller

Controller

RE: Recommended Reporting on the Income Statement for the Year Ended August 4, 1990, of

Damages Suffered from the Earthquake

On October 17, 1989, the Emporium division of CHHS suffered extensive damage due to the San

Francisco area earthquake that registered 7.1 on the Richter scale. Uninsured damages reached $27.5

million ($16.5 million after tax benefits.)

There are two best options for reporting the damages of exceedingly large and destructive earthquakes on

the income statement. Option one is to report the loss separate from operations as an extraordinary loss.

Option two is to include the loss in continuing operations but report it as a separate income statement

component. Both options would require footnotes for proper disclosure of the event.

Unusual or infrequent events may be reported as extraordinary items. The advantage of reporting

extraordinary items (especially losses) is simple: they are not included under normal operating income

and thus are usually not interpreted by investors and creditors as items that will occur in the foreseeable

future. Therefore, the event’s effects on net income are not judged as being extremely detrimental, since

they should not be occurring again. According to the Accounting Principles Board Opinion No. 30 under

paragraph 20, extraordinary items must both be unusual and infrequent in nature and must take into

account the environment in which the business operates. The key decision for CHHS is determining

whether the earthquake satisfies both criteria. According to paragraph 22 of APB 30, “An event of a type

that occurs frequently in the environment in which the entity operates cannot be considered as

extraordinary, regardless of its financial effects.” Paragraph 21 of the opinion states that unusual nature

may also not simply be established by events that are out of the control of management. Since there have...