Proposed Statement on Disclosure of Certain Loss Contingencies, an amendment of FASB Statements No. 5 and 141(R)
By Linda Cavanaugh, CPA - I am really far behind in my reading and I thought I would just give you a quick update on what is going on in the FASB realm. This proposed Statement is being issued due to concerns expressed by financial statement users that current disclosures on loss contingencies are not adequate. The concern is partly over quantitative disclosures and the “overuse” of the “not estimatable” criteria. Investors stated “they prefer to have a highly uncertain estimate supplemented with a qualitative description than no quantification of a potential loss as commonly occurs in existing practice (paragraph A16). This proposed Statement would expand the current disclosures and will result in a larger pool of contingencies being disclosed.
Paragraph 3 of the proposed Statement states that it is applicable for all loss contingencies that are within the scope of FAS 5 or FAS 141(R), except for the following:
2.Guarantees within the scope of FIN 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”
3.Unpaid claim costs or reinsurance contracts within the scope of FASB Statements 60, 97, 113, 120 or 163
4. Insurance-related assessments within the scope of SOP 97-3 “Accounting by Insurance and Other Enterprises for Insurance-Related Assessments”
5.Employment-related costs including pensions and other post employment benefits, except for withdrawal from a multi-employer plan
Under paragraph 5 a loss contingency does not have to be disclosed if:
1.An entity has made an assessment and determined that the likelihood of a loss is remote.
2.An unasserted claim or assessment in which there has been no manifestation by a potential claimant of an awareness of a possible claim or assessment unless:
a. It is probable that a claim will be asserted
b. The likelihood of a loss, if the claim were to be asserted, is more than remote.
However, under paragraph 6, even if the likelihood of a loss is remote, the loss contingency should still be disclosed if it is expected to be resolved within one year from the date of the financial statements or if the loss would have such a severe impact on the entity that it would cause a significant financial disruptive effect on the normal functioning of the entity.
Per paragraph 7, the following items are to be disclosed for loss contingencies that fall under the above paragraphs. The disclosures may be aggregated by the nature of the loss contingency (i.e. product liability).
1. The amount of the claim or assessment against the entity or if there is no claim or assessment amount, the entity’s best estimate of the maximum exposure to the loss. An entity may also disclose (but is not required) its best estimate of the possible loss or range of loss if the amount of the claim or the estimated maximum exposure is not representative of the entity’s actual exposure. These amounts should include any amount already recognized in the financial statement and exclude potential recoveries.
2. A description of the contingency, how it arose, its legal or contractual basis, its current status, the anticipated timing of its resolution, factors that are likely to affect the ultimate outcome and their potential effect on the outcome, the most likely outcome, significant assumptions concerning the estimate of amounts disclosed and in assessing the most likely outcome.
3. Any relevant insurance or indemnification arrangements that could lead to a recovery of some or all of the possible loss.
Per paragraphs 8 and 9, for loss contingencies recognized in the financial statements a tabular reconciliation of the beginning and ending balances must be disclosed.
2010 2009 2008
Increases for loss
during the period
Increases resulting from
changes in estimates of
the amounts of loss
Decreases resulting from
changes in estimates or
de-recognition of loss
Decreases resulting from
cash payments (or other
forms of settlement) for
An entity should also disclose the total amount of recoveries from insurance or indemnification arrangements recognized in each statement of financial position or statement of income presented that are related to the loss contingencies included in the above table.
The table disclosures are to be on a prospective basis and prior year comparisons do not need to be included for 2008 and 2009. (one year in 2008, two years in 2009, and three years in 2010 and beyond)
Per paragraph 10, a Type II subsequent event (occurs after reporting period but before financial statements are filed) should be disclosed pursuant to paragraph 7. If the loss contingency can be reasonably estimated, pro forma financial data may be provided as if the loss had occurred at the date of the financial statements.
Paragraph 11 gives an exemption from disclosure for information that is prejudicial, such as in pending or threatened litigation. If the information to be disclosed is considered to be prejudicial, then the entity may aggregate the disclosures required by paragraph 7 at a higher level such that the information is no longer prejudicial.
If the information is still prejudicial after aggregation, then the entity is not required to disclose the most likely outcome; significant assumptions concerning the estimate of amounts disclosed and in assessing the most likely outcome; or any insurance recoveries or indemnification arrangements. The other disclosures in paragraph 7 still need to be disclosed. This will be considered a rare event, but the FASB states that rare does not mean never.
If approved, this Statement would be effective for fiscal years ending after December 15, 2008 (i.e. the 2008 10K).
Stay tuned to see what changes take place over the next couple of months.
Linda is a CPA living in Southwestern Ohio, working as a research accountant for an investor-owned publicly traded utility company. She specializes in implementing new FASB and SEC requirements and FAS 133 derivative issues. In her role at the utility she has encountered many issues and written many memos, so send in your implementation and derivative issues and Linda will help figure out an answer.