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FASB Proposed Amendments to SFAS No. 5, Accounting for Contingencies

Gary P. Kreider, Mark A. Weiss and F. Mark Reuter
July 9, 2008

On June 5, 2008, the Financial Accounting Standards Board issued an Exposure Draft of a proposed Statement, Disclosure of Certain Loss Contingencies — an amendment of FASB Statements No. 5 and 141(R). The FASB is seeking to expand significantly the disclosures required about loss contingencies (including loss contingencies assumed in a business combination), such as pending or threatened litigation.

In issuing the Exposure Draft, the FASB is responding to concerns expressed by investors and others about the inadequacy of information currently available regarding the likelihood, timing and amount of future cash flows associated with loss contingencies.

Under the current FAS standard, loss contingencies that are “probable” require quantitative accruals in an issuer’s financial statements, and loss contingencies that are “reasonably possible” must be disclosed in a financial statement footnote accompanied by a range of potential loss, if estimable.

The proposal seeks to enhance current disclosure requirements by requiring that all loss contingencies be disclosed unless the issuer determines that the risk of loss is “remote.” If “remote”, an issuer would still be required to disclose if:
• the contingency (or contingencies) is (are) expected to be resolved in the near term (within one year from the date of the financial statements); and
• the contingency (or contingencies) “could have a severe impact on the entity’s financial position, cash flows, or results of operations.”

We believe that the proposed amendments present significant legal issues, particularly in the area of litigation. Not only would almost all litigation contingencies require some form of disclosure, but the disclosure itself could raise issues like waiver of attorney-client privilege (due to the need to obtain counsel guidance in order to quantify a potential loss, which guidance will ultimately be disclosed in the issuer’s financial statements or notes) and disclosure of litigation strategy (a loss estimate, for example, may greatly exceed a current or anticipated issuer settlement offer). Due to these and other issues, we believe that the American Bar Association and other groups will formally comment to the proposals.

The FASB wants to “field-test” this proposal with preparers, and it also hopes to hold at least one roundtable on the topic. If adopted, the proposed Statement would be effective for fiscal years ending after December 15, 2008, and interim and annual periods in subsequent fiscal years. Comments are due by August 8, 2008.

The following are our attorneys specializing in securities matters who may be of assistance to you:

Gary P. Kreider
(513) 579-6411

Mark A. Weiss
(513) 579-6599

F. Mark Reuter
(513) 579-6469

Michael J. Moeddel
(513) 639-3962

Bryan A. Jacobs
(513) 562-1456

If you would like more information regarding the proposed rule, please contact us.