FASB Stakes A Claim On Litigation Contingencies

At its board meeting last week (Aug. 19, 2009), the Financial Accounting Standards Board began redeliberations of its 2008 proposal on Disclosure of Certain Loss Contingencies http://www.fasb.org/draft/ed_contingencies.pdf . (See FASB Project Summary http://www.fasb.org/accounting_for_contingencies.shtml , and FASB staff's Comment Letter Summary http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocume... on last year's Exposure Draft. FEI's Committee on Corporate Reporting, Committee on Government Business, and Committee on Private Companies - Standards were among those who commented on the Exposure Draft; see FEI comment letterhttp://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175818384627&blobheader=application%2Fpdf .)

As detailed further below, FASB will continue to meet on this issue before issuing a final standard, which is currently slated to be issued 4Q09. The upcoming final standard could potentially be effective this year-end; as noted in FASB's board handout http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocume... (pdf pg 11, para. 5), FASB announced last year the final standard would be effective "no sooner than fiscal years ending after Dec. 15, 2009." However, FASB has not yet made a final decision on effective date, and will address that question at a future board meeting.

The discussion at the August 19 meeting focused on litigation contingencies; other types of loss contingencies will be discussed at a future meeting. Following are highlights from the August 19 meeting, as excerpted from FASB's Summary of Board Decisions, http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFAS... unless otherwise noted.

Disclosure objective: The board agreed on the following disclosure object for loss contingencies: An entity shall disclose qualitative and quantitative information about the loss contingency to enable a financial statement user to understand the nature of the contingency and its potential timing and magnitude.

Disclosure principles: The board agreed on three broad principles for loss contingencies:

(1) Disclosures about litigation contingencies should focus on the contentions of the parties, rather than predictions about the future outcome.
(2) Disclosures about a contingency should be more robust as the likelihood and magnitude of loss increase and as the contingency progresses toward resolution.
(3) Disclosures should provide a summary of information that is publicly available about a case and indicate where users can obtain more information.

Quantitative disclosure requirements: The board directed the staff to develop an approach that would focus on disclosure of nonprivileged quantitative information that would be relevant to making an estimate of the potential loss, for consideration by the Board at a future meeting.

Reasonably possible equals more than remote:The board decided to maintain the existing requirement to disclose asserted claims and assessments whose likelihood of loss is at least reasonably possible and to clarify that at least reasonably possible and more than remote have the same meaning.

Disclosure of certain remote contingencies: The board agreed that certain remote loss contingencies should be disclosed, and the board directed the staff to develop possible approaches for discussion at a future meeting.

Unasserted claims: The board agreed to maintain existing threshold requirements for unasserted claims and assessments and agreed to enhance the existing interpretive guidance about the threshold.

Recoveries, indemnifications, and settlement negotiations. The board agreed that:

- entities should not consider the possibility of recoveries from insurance or indemnification arrangements when assessing whether a contingency should be disclosed.
- to require disclosure about possible recoveries from insurance and other sources if and to the extent that the information has been provided to the plaintiff in discovery.
- not to require entities to disclose information about settlement negotiations.

Effective date: "The Board discussed the effective date of any final guidance on this project and decided not to rule out the possibility that it could be effective for fiscal years ending after December 15, 2009."

NOTE: Denise Lugo of BNA reported in the August 20 article, FASB Open to Changing Effective Date On Loss Contingency Accounting Disclosures, that: "FASB Chairman Robert Herz said it is remote that the guidance will be effective for the end of this calendar year, but the board decided to leave the issue open until it is further ahead on the bulk of its discussions."

Other Topics Discussed: Other topics discussed at FASB's Aug. 19 board meeting - separate from the loss contingencies project - included the scope of the financial instruments project, issues relating to FASB's revenue recognition project, and some technical corrections. See FASB's Summary of Board Decisions http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFAS....

For additional commentary on this subject, read 'my two cents' here: http://financialexecutives.blogspot.com/2009/08/fasb-stakes-claim-on-dis...