The FASB (Financial Accounting Standards Board) recently announced a delay in the effective date for the proposed Update of Accounting Standards Codification Topic 450 – Contingencies (formerly Statement of Financial Accounting Standards No. 5). Originally scheduled for release on December 15, 2010, the new effective date for the revisions will be determined at a future meeting. This delay means that companies with December 31 fiscal year ends will not be required to incorporate the Update into their 2010 Financial Statements. You can review the exposure draft here.
The proposed Update would require entities to disclose qualitative and quantitative information about loss contingencies to enable financial statement users to understand:
- The nature of the loss contingencies
- Their potential magnitude
- Their potential timing (if known).
The Exposure Draft summary acknowledges that during early stages information available about the contingency may be limited but reflects an expectation that in subsequent reporting periods, “disclosure would be more extensive as additional information about a potential unfavorable outcome becomes available.” The proposed Update also expands “the population of loss contingencies that are required to be disclosed to achieve more timely disclosure of remote loss contingencies with a potentially severe impact.” Entities are specifically precluded from considering potential insurance recoveries or other indemnification arrangements when assessing the materiality of loss contingencies.
The FASB received comments on the Exposure Draft from many sources expressing concerns with the proposed Update. Included in the more than 380 letters received referencing this matter were comments from the Association of Corporate Counsel (ACC), who expressed concerns that the updated standard would have a “negative impact on privilege, damage to the accuracy of reporting, and disadvantages to reporting companies engaged in litigation.”; the Financial Reporting Executive Committee and the Private Companies Practice Section of the American Institute of Certified Public Accountants (AICPA); the American Bankers Association; as well as numerous individual companies and accounting firms. You can review a list of the commenters and copies of the comments here.
As a result of the comment letters received, the FASB announced that the Board would redeliberate the proposed Update and make changes as appropriate, including working with the SEC and PCAOB to address investor concerns and compliance issues. According to the FASB’s Project Update, it is expected that redeliberations will begin in the second half of 2011.