FASB Cancels Topic 450, Loss Contingency Project

By Cydney Posner

As reported this morning in the corporatecounsel.net blog, yesterday FASB removed from its agenda its ongoing project regarding proposed loss contingency disclosure, ASC Topic 450: Disclosure of Certain Loss Contingencies (fka FAS 5). FASB commenced the project in 2007 and issued two exposure drafts. As you might recall, the proposal 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. The proposal was highly controversial. In particular, many were concerned – that's probably an understatement -- that the disclosure could have prejudiced a company's position in litigation or settlement talks (for example, where the company's adversary may have underestimated the full potential of the claim). Concerns were also raised that the disclosures would have presented the risk of waivers of the attorney-client or work product protections. (See my articles of 12/19/08, 4/15/10 and 7/22/10). According to FASB, "there was overwhelming opposition to the enhanced loss contingency disclosures. The main concerns identified related to the imposition of disclosures that could be prejudicial to the reporting entity."

But don't celebrate too much – the SEC has taken up the cudgels on this issue, sending "Dear CFO" letters to the big banks in 2010 reminding them that they were required to make disclosures when there is a "reasonable possibility" of a loss. As a result, apparently with some additional pressure from the SEC, most of the large banks did include quantitative disclosure regarding loss contingencies in their Forms 10-K. (See my article of 3/8/11.) As a number of us have experienced recently, the SEC's interest in more quantitative disclosure did not stop with the big banks. The staff also indicated in presentations last year that the absence of historical disclosure regarding "reasonably possible" losses could well be subject to comment, particularly when settlements are disclosed in future periods, and the Corp Fin Chief Accountant has cautioned that that the staff would be looking at reporting of litigation contingencies "under a microscope."

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