Maria Elena Cruz
Controller for Carter Hawley Hale Stores
Chief Financial Officer of Carter Hawley Hale Stores
Recommendation as to the proper reporting of the earthquake damage costs in the income statement for the year ending August 4, 1990. DATE: October 27, 2010
The Emporium division of Carter Hawley Hale Stores (CHHS) suffered extensive damage due to the 7.1 richter scale earthquake that hit the San Francisco Bay Area on October 17, 1989. The uninsured total cost of the damage was $27.5 million ($16.5 million after tax benefits). For the fiscal year ending August 4, 1990, CHHS reported an after-tax loss of $9.47 million before considering the earthquake loss. The purpose of this memo is to point out the different methods to report the earthquake loss and explain which will be the best method to use and why.
On the Income Statement, losses caused by Earthquakes of large magnitude can be reported in one of two ways, as an extraordinary item, or as part of continuing operations but as a separate component of the income statement. Extraordinary items, according to the FASB, are material events and transactions that are both unusual in nature and infrequent in occurrence. Extraordinary items are presented separate from continuing operations, net of tax, below discontinued operations.
After tax Loss before extraordinary items(*$9,470,000)
Extraordinary Loss, (net of $11 million tax benefit)($16,500,000) Net Loss($25,970,000)
(*After tax loss reported for the fiscal year ending August 4, 1990 before considering the earthquake loss)
A material event or transaction that is unusual in nature or infrequent in occurrence, but not both, is included in continuing operations but reported as a separate component of the income statement.
Loss due to Earthquake damage $27,500,000
Income tax40%(tax benefit)($11,000,000)
Operating Loss ($16,500,000)...