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Update on FASB's Exposure Draft for Disclosing Loss Contingencies

Audit

By Andrew DiLuciano

The Financial Accounting Standards Board’s (FASB) proposed accounting standards update relating to loss contingencies has somewhat fallen off the radar in the last few months as the FASB continues deliberations in response to comment letters it received. However, it is important to keep tabs on this update since it has financial reporting implications for all companies. It also affects the legal profession and its relationship with the accounting profession. Let’s recap the main changes proposed by this update and discuss the timeline of events that have occurred and that are expected to occur.

In July 2010, the FASB issued an exposure draft of an accounting standards update relating to the disclosure of certain loss contingencies. The purpose of this update was to enhance existing contingency disclosures by expanding the number of loss contingencies disclosed, require disclosure of certain remote loss contingencies, and require increased disclosures related to the nature, magnitude and timing of potential loss contingencies. Many of these disclosures would be required in the early stages of a loss contingency’s life cycle. This represents a change from current practice.

The comment letter period for this update ended in September 2010 and approximately 340 comment letters were received, and just over 85% of the respondents did not support the proposed update. The main hang-up is the challenge of striking a balance between having transparent financial statement disclosures and protecting confidential litigation information. For the good of financial statement users, the FASB wants the most information possible to be disclosed relating to loss contingencies. But companies and attorneys have concerns about disclosing so much information because they claim it could do real damage to their litigation defenses if their positions and projections are disclosed early in a litigation matter. It could also jeopardize what’s referred to as “the treaty” between the accounting and the legal profession. Under this “treaty”, attorneys are not expected to conclude as to the outcome of litigation unless they are nearly certain their predictions are right.

The FASB last met on this matter in November 2010 and reached no major decisions regarding this update, and there is currently no timeframe for an expected effective date. The FASB’s plan is to work with the SEC and PCAOB relating to investor concerns. The FASB is not expected to meet again on the matter until the second half of 2011.

These proposed revisions originally began in 2008, which is why the FASB had an aggressive timeframe for the July 2010 exposure draft. The initial effective date was set for companies’ December 31, 2010 financials. However, that date was delayed after responses to the comment letters were reviewed. Whatever decisions the FASB makes, it will most likely move quickly to get them implemented, and companies will need to be ready for the changes. Companies should monitor this situation and prepare for the possibility that some of these enhanced disclosures will be required. It might be a good idea to contact your attorneys handling litigation matters to see how they are monitoring this situation as well. To stay ahead of the curve, you could discuss which cases could be seriously affected by having to disclose some of the potentially required information.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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