FASB Proposal on Amending Disclosures for Contingencies
On July 20, 2010, FASB issued a proposed accounting standards update for Contingencies (ASC 450 - for me stil SFAS No. 5). At 77 pages, I haven't read the whole thing. Comments are due August 20, 2010.
Some highlights (I'm either paraphrasing from the document or freely quoting):
- The amendments would apply to both public and nonpublic entities, except nonpublic entities would not be required to provide a tabular reconciliation of accrued loss contingencies.
- The intent is for greater disclosure of contingencies, with the objective that financial statement users are able to understand (1) the nature of loss contingencies, (2) their potential magnitude, and (3) their potential timing.
- FASB recognizes entities would need to consider new principles to meet these objectives. It appears disclosure would be needed earlier than under current standards, and that disclosure may be less extensive in early stages of a loss contingency. In later periods, more disclosure would be necessary. They also say that an entity may aggregate disclosures about similar contingencies.
- The amendments would require disclosure of certain remote loss contingencies with a potentially severe impact. This would expand the population of loss contingencies that are required to be disclosed. Entities would not be allowed to consider the possiblity of recoveries from insurance or other indemnification arrangements.
- In the case of litigation contingencies, additional disclosures would be required, such as the contentions of the parties and how users can obtain additional information about the litigation.
FASB states the amendments would retain disclosures required under current U.S. GAAP and enhance them with additional information. For public entities, the effective dates would be for fiscal years ending after December 15, 2010. For nonpublic entities, the new guidance would be effective for the first annual period beginning after December 15, 2010.
I also looked at the specific questions asked by the Board. I particularly like Question 2: Are the proposed disclosures auditable? If not, please explain why.
Finally, this is not quite in sync with IFRS, although they indicate IASB is deliberating changes to their standards but on a much broader scope.
I have some quick thoughts on this:
- I don't see entities, be they public or nonpublic, jumping up and down with excitement on these expanded disclosures.
- I'm bothered that in having to disclose "certain remote loss contingencies with a potentially sever impact" that the entity can't take into consideration insurance. That just seems unfair.
- As an SEC auditor, I'm very concerned about how I'd audit these disclosures. Attorneys already do their best to respond to audit letters with as little information as possible. How are entities going to get the information they need, and how are we as auditors going to be able to "get happy" with the disclosures.
I've never thought of responding to questions in a proposed standard, but I just might this time.
Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies. Joel writes observations on different matters and especially on working with and using LinkedIn. He thinks he has a sense of humor.