FASB Issues New Exposure Draft on Disclosure of Certain Loss Contingencies

On July 20, 2010, the Financial Accounting Standards Board issued a new Exposure Draft of a proposed Statement, Contingencies (Topic 450), Disclosure of Certain Loss Contingencies. The FASB has proposed various amendments to Topic 450, formerly known as FASB Statement No. 5, in response to investor concerns about the inadequacy of information currently available regarding the likelihood, timing and amount of future cash flows associated with loss contingencies.

The FASB's first Exposure Draft (issued in 2008) received significant push back from the American Bar Association and other groups concerned that additional disclosures in this area could potentially jeopardize attorney-client privilege and reveal litigation strategy. The new Exposure Draft is the result of the FASB directing its staff to retool its approach so that it focuses on disclosure of nonprivileged quantitative information.

Under the new Exposure Draft, companies would still be required to disclose loss contingencies (including asserted claims) where the likelihood of loss is at least reasonably possible. The Exposure Draft would also require disclosure of certain remote loss contingencies, based on (i) their potential effect on the company's operations; (ii) the cost to the company of defending against the claims; and (iii) the amount of effort and resources management may have to devote to resolving them.

The new Exposure Draft requires companies to disclose qualitative information about the loss contingencies that would enable financial statement users to understand their nature, potential timing, and potential magnitude and, for litigation contingencies, to obtain additional information from publicly available sources like court records. The Exposure Draft also requires companies to disclose certain quantitative information for all contingencies that are at least reasonably possible and to make scaled-back quantitative disclosures for those remote loss contingencies requiring disclosure based on the three factors listed above. Finally, the Exposure Draft would require public companies to disclose in tabular format reconciliations by class of recognized (i.e. accrued) loss contingencies in tabular format for each period for which an income statement is presented.

The new Exposure Draft is subject to a 30-day comment period (ending August 20, 2010) and the FASB intends to issue the final Statement shortly after this comment period ends. If the new Statement is adopted on this timeline, for public companies, it will take effect for fiscal years ending after December 15, 2010 and, for nonpublic companies, it will take effect for fiscal years beginning after December 15, 2010.

We will continue to monitor developments with respect to Topic 450 and this new Exposure Draft, so please check back for an updated blog post once the FASB issues its final Statement.


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