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4557

Public Company Financial Executive Briefing

MODIFICATION TO LOSS CONTINGENCIES DISCLOSURES

By Suzie Doran, CPA - Senior Manager, Assurance & Advisory Practice TUESDAY, AUGUST 3, 2010

EXECUTIVE SUMMARY
On July 20, 2010, the FASB issued an
exposure draft applicable to both public and
nonpublic entities regarding new disclosures
about certain loss contingencies. This is to
address concerns that the current guidance
on contingencies under ASC 450 does not
provide adequate and timely information
in assessing the likelihood, timing and
magnitude of future cash outflows associated
with loss contingencies. The new guidance
would be effective for public entities with
fiscal years ending after December 15,
2010, and interim and annual periods in
subsequent fiscal years and for nonpublic
entities for the first annual period beginning
after December 15, 2010, and for interim
periods of fiscal years after the first annual
period.
SUMMARY OF ACCOUNTING
BACKGROUND:
This guidance would apply to all loss
contingencies that are within the scope
of existing contingencies or business
combinations standards with some scope
exceptions. The purpose would be to
ensure that disclosures include all publicly
available information, including qualitative
and quantitative, which allow users of the
financial statements to better understand
the nature and potential magnitude of a
loss contingency. It also allows entities
to aggregate disclosures on similar
contingencies such as by class or type as
long as the entities disclose the basis for
aggregation.
CHANGES:
Threshold: The threshold requirements
would remain the same, except certain
remote contingencies may require disclosure
under this new standard to alert users about
the entity’s vulnerability to a potential severe
impact due to the contingency’s nature,
timing or magnitude. Judgment will need to
be exercised in determining if the threshold
has been met where the impact of “severe”
(defined as significant financially disruptive
effect on normal operations of entity)
may have more impact than the impact of
“material.” This would include assessing the
potential effect on operations, expected legal
costs and the extent to which management
will need to focus efforts on resolving
contingency.
Quantitative and Qualitative Disclosures:
Quantitative disclosures including publicly
available information would include the
amount claimed by the plaintiff, damages
indicated by expert witnesses, and an
estimate of loss or range of loss (or
statement explaining why an estimate cannot
be given). Remote contingencies meeting
disclosure requirements would not require an
estimate of loss or range of loss. Disclosures
on possible recoveries from insurance
arrangements may also need to be required.
Financial statements should not be netted
for the amount of contingent liabilities and
potential recovery amounts.
For each income statement period included
in the financial statements, a tabular
reconciliation of all loss contingencies by
class for each accrual account will need
to be presented. The exposure draft
specifies descriptions of such activities with
a description required for any significant
activities, which also need to be disclosed.
Loss contingencies from a business
combination should be included in this
reconciliation, but presented separately if
they are fair valued. Nonpublic entities are
not required to present this reconciliation in
their footnotes.
Qualitative disclosures are required on the
nature, risks and timing of the contingencies.
For example, legal contingencies would need
to address the basis of the plaintiff claim
and the expected defense of the entity.
Settlement negotiations would not need to
be disclosed. Material contingencies would
need additional information such as the court
name, parties to the suit, date of the claim
and a description of the underlying facts.
If available, a timeline of expected steps
towards resolution should also be disclosed.
____________________________________
For more information, please refer to the
proposed ASU, “Disclosure of Certain Loss
Contingencies (Contingencies - Topic 450).”

FOR FURTHER INFORMATION, PLEASE CONTACT ONE OF THE FOLLOWING:

Suzie Doran:   Jim Pitrat:  Harmeet Singh:  Gale Moore:  

SDoran@singerlewak.com  JPitrat@singerlewak.com  HSingh@singerlewak.com  GMoore@singerlewak.com 
310.477.3924 310.477.3924 408.294.3924 949.261.8600 
Senior Manager Practice Leader Business Combinations Subject Matter Expert  Business Combinations Subject Matter Expert 
Assurance & Advisory Assurance & Advisory Los Angeles, Silicon Valley  Orange County, San Diego