equipment; are bighly subjective and difficult for iavestors to verify. Then, by excessively relieving future periods of charges for amortization, core earnings in future years are over stared. There is no requirement under current GAAP to separate out the effects of prior writedowns from core earnings." Thus, the accounting for unusual and non-recurring items has the potential to confuse the evaluation of earnings persistence. ‘These jssues were investigated by Elliott and Hanna (1996), who found a significant decline in the core earnings ERC in quarters following the reporting of a large unusual icem (usually, these were losses rather than gains). Furthermore, the ERC declined further if the firm reported numerous large special items over time. This latter evidence is consis cent with the market interpreting the frequency of recording of unuisuiil and non-recurring items as a proxy for their potential misuse. We will return to the impact of extraordinary, unusual, and non-recutring items on core earnings in our discussion of earnings manage- ment in Chapter IL Thos, the question appears to be open whether Section 3480 actually succeeded in improving financial reporting. From our standpoint, however, Section 3480 represents an interesting example of how theary can be brought to hear to reexamine an issue that was though resolved As a result of the September 11 terrorist attacks in the United States, numerous companies incurred substantial expenses and revenue losses. For example, airlines were unable to fly for two days. ln the United States, accounting standards for extraordinary items are similar to those given above for Canada, In a 2001 news release, the FASB decided against allowing costs resulting from the attacks to be treated as extraordinary items, The FASB had originally considered allow- ing at least some costs as extraordinary, but came to the conclusion that it would be impossible to reliably separate direct costs (e.g,, airlines’ losses ‘of revenue during the two-day shutdown) from indirect costs (@.9,, continuing loss of customers from public concerns about safety, and general loss of business and consumer confidence). Also, some of these costs would be recovered through insurance and government assistance. Conseq- ently, the FASB cancluded that all costs resulting from September 11 be classified as part af income from continuing operations, with any government. assistance also reported in continuing operations, asa separate line item In this regard, The Globe and Mail, in an October 29, 2001, article, quoted Patricia O'Malley, @ prominent Canadian accountant and member of the International Accounting Standards Board, as saying, “Given the world we live in, it would bbe hard to call them extraordinary.” 5.6 A CAVEAT ABOUT THE “BEST” ACCOUNTING POLICY To chis pount, we have argued that accountants can be guided by securities marker reaction in devermmining usefulness of financial accounting information. From this, itis eempting to 164 Ghxpter 5