FASB Meeting on Statement No. 5, Disclosure of Certain Loss Contingencies

Below are FASB's posted notes on yesterday's meeting regarding the FASB's renewed deliberations on the controversial Statement No. 5, Disclosure of Certain Loss Contingencies (originally cited in Corporate Counsel).

For more background, please review news brief postings on 7/18/08, 9/26/08 and 12/19/08. The initial exposure draft deservedly created quite a stir among companies, as well as among legal and accounting professionals, because it would have expanded both the number and type of loss contingencies that were required to be disclosed and the extent of disclosure of specific quantitative and qualitative information about those loss contingencies. It appears from the notes that the new draft will retain many of the expanded requirements.

The original proposal raised such concern that FASB decided to delay issuance of a final standard and reconsider the matter. In particular, issues were raised about the increase in the number and nature of loss contingencies that would have required analysis and disclosure, even where the possibility of loss was truly remote, as well as the requirement that a company provide certain additional qualitative and quantitative disclosure, including an estimate of its exposure (where no amount has been claimed) and its estimate as to the timing of resolution of the litigation. In that regard, many were concerned that the disclosure could have adversely affected a company's liability in litigation or settlement talks (for example, where the company's adversary may have underestimated the full potential of the claim) and compromised a company's litigation or settlement position. Concerns were also raised that the disclosures would have presented the risk of waivers of the attorney-client or work product protections.

Although no firm conclusions can be reached until the actual exposure draft has been, well, actually exposed for comment, many of the concerns appear to remain (see, e.g., the requirements regarding remote contingencies, disclosure of amounts accrued and tabular reconciliation of contingent loss accruals, etc). The new exposure draft would be effective for fiscal years ending after December 15, 2010 and subsequent interim periods.

See the FASB notes below:

Disclosure about certain loss contingencies. The Board continued its redeliberations of the project. The following summary of decisions reached at today's meeting also incorporates and updates the tentative decisions reached at the August 19, 2009 meeting.

1. Disclosure Objective

An entity shall disclose qualitative and quantitative information about loss contingencies to enable financial statement users to understand their nature, potential timing, and potential magnitude.

2. Disclosure Principles

To achieve the above objective, an entity shall consider the following principles in determining disclosures that are appropriate for its individual facts and circumstances:

a. During early stages of a contingency's life cycle, an entity shall disclose information (even though its availability may be limited) to help users understand the nature and potential magnitude of a loss contingency. In subsequent reporting periods, disclosure shall be more extensive as additional information becomes available.

b. An entity may aggregate disclosures about similar contingencies (for example, by class or type) so that the disclosures are understandable and not too detailed. If an entity provides disclosures on an aggregated basis, it shall disclose the basis for aggregation.

3. Disclosure Threshold

The Board decided to maintain the existing requirement to disclose asserted claims and assessments whose likelihood of loss is at least reasonably possible.

The Board also decided that disclosure of certain remote loss contingencies, due to their nature, potential timing, or potential magnitude, may be necessary to inform users about the entity's vulnerability to a potential severe impact. An entity will need to exercise judgment in assessing its specific facts and circumstances to determine whether disclosure about remote contingencies is necessary. Factors that an entity may consider in making this determination include any of the following:

a. The potential effect on the entity's operations

b. The cost to the entity for defending its contentions

c. The amount of efforts and resources management may have to devote to resolve the contingency.

The plaintiff's amount of damages claimed, by itself, does not necessarily determine whether disclosure about a remote contingency is necessary although it could be one of the factors to be considered in this determination.

When assessing the materiality of loss contingencies to determine whether disclosure is required, the entity shall not consider the possibility of recoveries from insurance or other indemnification arrangements.

4. Qualitative Disclosures

For all contingencies that meet the disclosure threshold, disclose the following:

a. Qualitative information to enable users to understand the nature and risks of a contingency or group of contingencies.

b. During early stages of asserted litigation contingencies, disclosure shall include, at a minimum, the contentions of the parties (for example, the basis for the claim and the amount of damages claimed by the plaintiff and the basis for the entity's defense or a statement that the entity has not yet formulated its defense). In subsequent reporting periods, disclosure shall be more extensive as additional information becomes available, for example, as the litigation progresses toward resolution and/or if the likelihood and magnitude of loss increase. Furthermore, if practicable, an entity shall disclose the anticipated timing of, or the next steps in, the resolution of individually material asserted litigation contingencies.

c. For individually material contingencies, the disclosure shall be sufficiently detailed to enable financial statement users to obtain additional information from publicly available sources such as court records. For example, an entity shall disclose the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding, and its current status.

d. When disclosure is provided on an aggregated basis, an entity shall disclose the basis for aggregation and information that would enable financial statement users to understand the nature, potential timing, and potential magnitude of loss.

5. Quantitative Disclosures

For all contingencies that are at least reasonably possible, disclose the following:

a. Publicly available quantitative information, for example, in case of litigation contingencies, the amount claimed by the plaintiff or the amount of damages indicated by the testimony of expert witnesses

b. An estimate of the possible loss or range of loss and the amount accrued, if any

c. If the possible loss or range of loss cannot be estimated, a statement that an estimate cannot be made and the reason(s) therefore

d. Other nonprivileged information that would be relevant to financial statement users to enable them to understand and/or assess the possible loss

e. Information about possible recoveries from insurance and other sources only if, and to the extent that it has been provided to the plaintiff(s) in a litigation contingency, it is discoverable either by the plaintiff or by a regulatory agency, or it relates to a recognized receivable for such recoveries. If the insurance company has either denied or contested the entity's claim for recovery, the entity shall disclose that fact.

For those remote contingencies that meet the disclosure threshold, disclose the following:

f. Publicly available quantitative information, for example, in case of litigation contingencies, the amount claimed by the plaintiff or the amount of damages indicated by the testimony of expert witnesses

g. Other nonprivileged information that would be relevant to financial statement users to enable them to understand and/or assess the contingency's potential impact

h. Information about possible recoveries from insurance and other sources only if, and to the extent that it has been provided to the plaintiff(s) in a litigation contingency, it is discoverable either by the plaintiff or by a regulatory agency, or it relates to a recognized receivable for such recoveries. If the insurance company has either denied or contested the entity's claim for recovery, the entity shall disclose that fact.

6. Tabular Reconciliation

For each period for which a statement of income is presented, public entities shall disclose reconciliations by class, in a tabular format, of recognized (accrued) loss contingencies to include all of the following:

a. The carrying amounts of the accruals at the beginning and end of the period

b. Increases (that is, amount accrued during the period) for new loss contingencies recognized during the period

c. Increases for changes in estimates for loss contingencies recognized in prior periods

d. Decreases for changes in estimates for loss contingencies recognized in prior periods

e. Decreases for cash payments or other forms of settlements during the period.

An entity shall describe the significant activity in the reconciliation and disclose the line items in the statement of financial position in which recognized (accrued) loss contingencies are included. All loss contingencies recognized in a business combination shall be included in the reconciliation but shown separately if they have a different measurement attribute (for example, fair value versus probable loss amount).

7. Scope

The Board decided that the disclosures shall apply to all entities except that the tabular reconciliation of accrued contingencies is not required for nonpublic entities.

8. Reexposure

The Board decided that the draft standard should be re-exposed and that the Exposure Draft should have a 30-day comment period.

9. Effective Date

The new guidance shall be effective for fiscal years ending after December 15, 2010, and interim and annual periods in subsequent fiscal years except that for nonpublic entities the new guidance shall be effective for the first annual period beginning after December 15, 2010, and for interim periods of fiscal years subsequent to the first annual period.

10. The Board directed the staff to begin drafting the revised Exposure Draft.

11. The Board expects to issue the Exposure Draft in the second quarter of 2010 that will have a 30-day comment period.

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