SEC Focus on Loss Contingency Disclosure

By Cydney Posner

You might be interested in this article from The New York Times, which discusses the more extensive 10-K disclosure provided by big banks regarding their potential litigation and other legal exposure. Not only are the numbers enormous (e.g., $4.5B for JPMorgan), but what's most interesting is that there are so many numbers disclosed at all. The quantitative specificity was apparently prompted by 2010 "Dear CFO" letters from the SEC reminding the banks that they are required to make disclosures when there is a "reasonable possibility" of a loss. The article reports that the SEC actually "followed up to make sure they would provide deeper information. One executive remarked the agency's reminders were, put politely, forceful." Only Morgan Stanley decided not to provide a catch-all number, opting instead to provide only its estimate for two separate lawsuits with potential aggregate exposure of $518M.

While attention may for the moment be focused on the big banks, there's no reason to assume that the interest in more quantitative disclosure will stop there. In several fairly recent presentations (in addition to one aimed specifically at financial institutions), the accounting staff indicated that the absence of historical disclosure regarding "reasonably possible" losses could well be subject to comment, particularly when settlements are disclosed in future periods. As discussed in the July 22, 2010 and October 28, 2010 news briefs, the FASB has proposed a new standard for Disclosure of Certain Loss Contingencies (Topic 450, FKA FAS 5), which would require public entities to provide enhanced disclosures regarding contingencies, although, as a result of substantial blowback, it has decided to reconsider the highly controversial proposal. In addition, Broc and Dave's Blog on TheCorporateCounsel.net has reported that the Corp Fin Chief Accountant recently cautioned that reporting of litigation contingencies "will be under a microscope this financial reporting season" and that, at a recent NY Bar Association conference, he also warned against over-reliance on the ABA-auditor treaty in reporting litigation contingencies on financial statements (although the bar is certainly interpreting his comment as intended to address the disclosure obligations of public companies as opposed to those of lawyers under the treaty).

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