Project Updates
Accounting for Contingencies
Last Updated: March 28, 2008 (Updated sections are indicated with an asterisk *)
The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.
Objectives
*Decisions Reached at the Last Meeting
*Summary of Decisions Reached to Date
*Next Steps
*Board Meeting and Public Meeting Dates
History and Background
*Contact Information
Objectives
The objective of this project is to reconsider the accounting for certain nonfinancial liabilities and contingencies, including contingencies under FASB Statement No. 5, Accounting for Contingencies. As an interim step, this project will consider the need for enhanced disclosures about contingencies to provide users of financial statements with useful, transparent, and timely information.
*Decisions Reached at the Last Meeting
The Board decided to expose for comment a proposed amendment to FASB Statement No. 5, Accounting for Contingencies. The Board also decided that the proposed amendment will have a 60-day comment period and that a public roundtable discussion on the Exposure Draft will be held.
*Summary of Decisions Reached to Date
Project Plan and Scope
The Board decided that this project should focus on (1) certain nonfinancial liabilities, including liabilities under FASB Statements No. 143, Accounting for Asset Retirement Obligations, and No. 146, Accounting for Costs Associated with Exit or Disposal Activities, and (2) contingencies, including contingencies under Statement 5. At a future meeting, the Board plans to clarify the scope and timing of the project, and to identify potential convergence issues relating to the IASB’s project to reconsider the guidance in IAS 37, Provisions, Contingent Liabilities, and Contingent Assets.
As an interim step, this project will consider the need for enhanced disclosures about contingencies in Statement 5.
Disclosure
The Board decided to issue for comment an Exposure Draft incorporating the following decisions:
Scope—The Board decided the proposed standard should apply to loss contingencies in the scope of Statement 5, FASB Statement No. 141 (revised 2007), Business Combinations, and not in the scope of guarantees accounted for according to FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Board also decided not to amend the disclosure requirements in Interpretation 45 as part of this project.
Principle—The Board affirmed that the proposed standard principle would require an entity to provide disclosures that are sufficient to enable users of financial statements to assess the likelihood, timing, and amount of future cash flows associated with loss contingencies. Those disclosures should include discussion of the risks loss contingencies pose to the entity and their effects on the financial statements.
Disclosure Threshold—The Board decided that all loss contingencies should be disclosed unless certain narrow criteria are met. If management determines that the likelihood of a loss is remote, disclosure would not be required. However, the Board decided that any contingency, regardless of the likelihood of a loss, with the potential to result in a near-term and severe impact on the financial position, cash flows, or results of operations of an entity should be included within the scope of the proposed amendment.
Quantitative Requirements—The Board decided to require that an entity disclose the claim amount or, in the absence of a claim amount, an estimate of the maximum potential exposure to loss. An entity would be allowed the option to include a supplemental disclosure of its best estimate of the possible loss or range of loss if it believes the claim or maximum amount is not indicative of the entity’s actual exposure. Other disclosures that will be required include:
- Reconciliation—The Board decided to require a tabular reconciliation of the aggregated changes in the total amount recognized for loss contingencies in the statement of financial position from the beginning to the end of each reporting period.
- Recoveries—The Board decided to require a qualitative and quantitative description of the terms of relevant insurance or indemnification arrangements that could lead to a recovery of some or all of the possible losses and disclosure of the amount accrued for recoveries.
Qualitative Requirements—The Board decided to require that an entity disclose information, including the description of the contingency, a description of the factors that are likely to affect the ultimate outcome of the contingency, management’s qualitative assessment of the most likely outcome of the contingency, and any assumptions made by management in estimating the amounts in its quantitative disclosures and in assessing the most likely outcome.
Reporting Period—The Board decided that the proposed disclosures should be provided in both annual and interim reporting periods.
Prejudicial Exemption—The Board decided to include a prejudicial exemption that would consist of a two-step process. First, an entity would be allowed to aggregate the required disclosures about loss contingencies at a higher level than otherwise allowed such that the information is not prejudicial. Second, in rare cases in which disclosures aggregated at a higher level still would be prejudicial (for example, if an entity is involved in only one legal dispute), the entity would be allowed to forego disclosing only the information that would be prejudicial to the entity’s case. The Board asked the staff to clarify that in no circumstance may an entity forego providing the amount of the claim, a description of the contingency, and a description of the factors that are expected to affect the ultimate outcome of the contingency.
Transition and Effective Date—The Board decided that the proposed amendment should be effective for annual financial statements issued for fiscal years ending after December 15, 2008, and for interim and annual periods in subsequent fiscal years.
The Board directed the staff to proceed to a draft of a proposed Statement for vote by written ballot.
*Next Steps
The Board expects to issue the Exposure Draft in the second quarter for a 60-day comment period. Shortly after the comment period, a public roundtable discussion will be held.
*Board Meeting and Public Meeting Dates
The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Statement, Interpretation, or FSP.
The following are links to minutes for each meeting.
Below is a list of the FASB Board/Public meetings. Minutes for meetings generally are posted within two weeks following the meeting.
History and Background
In March 1975, the Board issued Statement 5 to address the accounting for contingencies. Since that time, Statement 5 has affected the accounting for many transactions that involve some component of uncertainty. When Statement 5 was issued, the existing conceptual framework, including the definition of financial statement elements, was not in place. Different models have been developed for the accounting for certain contingencies and nonfinancial liabilities subsequent to the issuance of Statement 5, based on the guidance on measurement and the definitions of elements in the conceptual framework.
The Board has received comments from constituents that differing models for contingencies and nonfinancial liabilities create complexity in practice. Consequently, the Board had been contemplating adding a project to reconsider the accounting for contingencies and other nonfinancial liabilities. In addition, users of financial statements have said that the disclosure criteria in Statement 5 are inadequate or ineffective and disclosure of contingencies in practice seems limited.
At the September 6, 2007 meeting, the Board decided to add a comprehensive project on accounting for certain nonfinancial liabilities, including contingencies, to its technical agenda. This project will include research about a possible interim solution for disclosures and a comprehensive reconsideration of the recognition and measurement of certain nonfinancial liabilities, including contingencies. In determining the project’s scope, the Board will consider whether the comprehensive reconsideration of the accounting for certain nonfinancial liabilities can be converged with the IASB’s current project on the reconsideration of IAS 37.
*Contact Information
Chris Roberge
Project Manager
ceroberge@fasb.org
David Elsbree
Practice Fellow
dbelsbree@fasb.org
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