Carter Hawley Hale Stores (CHHS), Inc. was one of the largest department store retailers in the United States. At the end of fiscal 1989, the company operated 113 stores in the sunbelt regions of the country. The company's divisions included The Broadway, with 43 stores in Southern California and 11 stores in the southwest, and Emporium, with 22 stores in the greater San Francisco Bay Area.

On October 17, 1989, a 7.1 Richter scale earthquake caused significant amounts of monetary damage to the San Francisco Bay Area. This was the largest earthquake to hit the Bay Area since the quake of 1906 destroyed much of San Francisco. California is lined with many active earthquake faults. Hundreds of small earthquakes occur each year throughout the state.

The Emporium division of CHHS suffered extensive damage as a result of the October 17 earthquake. Twelve of the twenty-two stores were closed for varying periods of time, with the Oakland store hardest hit. In total, uninsured 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. Total revenues for the year were $2.857 billion.

Required:

Assume that you are the CHHS controller. The chief financial officer of CHHS has asked you to prepare a short report (1–2 pages) in memo from giving your recommendation as to the proper reporting of the earthquake damage costs in the income statement for the year ending August 4, 1990. Explain why your recommendation is appropriate. Be sure to include in your report any references to authoritative pronouncements that support your recommendation.