Industry Insights

The Financial Accounting Standards Board (FASB) continues to wrestle with concerns and topics from comments related to its recent exposure draft of a proposed Accounting Standards Update, Contingencies (Topic 450): Disclosure of Certain Loss Contingencies. The proposed update would expand disclosures related to certain loss contingencies by replacing currently required disclosures under Section 450-20-50 (formerly FAS 5).

The exposure draft was issued July 20, 2010, with comments originally due August 20, 2010; the due date for comments was later extended to September 20, 2010. FASB met in November 2010, determined that further deliberation related to key concepts in the exposed material is necessary and indefinitely delayed the effective date (originally intended to be for annual financial statements issued for fiscal years ending after December 15, 2010). FASB plans to meet again, possibly in the second or third quarter of 2011, to continue its discussion.

Some of the key concepts in the proposed amendment being deliberated—and their potential effects on the construction and real estate industries—include:

• Cost/benefit of new disclosures:  Comments include concerns that the cost of implementing increased disclosures would significantly outweigh the benefit to financial statement users.
• Remote contingency disclosures:  The proposed amendments would require disclosure of remote contingencies that could have a severe effect on the financial statements. Commenters have expressed concern that disclosing remote contingencies would create confusion for financial statement users. It could be difficult for contractors or developers to identify remote contingencies that could have severe, adverse effects on their businesses. 
• Potential loss contracts:  Commenters have expressed concern that the exposure draft potentially overlaps accounting and financial statement disclosures for performance contracts. Contractors and other similar entities would likely need additional clarification from FASB to ensure potential loss contracts are exempt from the revised disclosures.
• Auditing remote contingency disclosures and other qualitative analysis:  Some comments expressed concern about “auditability” of remote contingency disclosures. In addition, auditors will likely want to test qualitative analysis and loss estimates as part of audit procedures, leading to increased pressure to seek out potentially privileged information to test disclosures.
• Multiemployer benefit plan liabilities:  Commenters have expressed concern that revised disclosure thresholds may alter circumstances in which an entity might be required to disclose withdrawal liabilities and that such disclosures may not accurately reflect the financial position of the entity. More specifically, there may be a conflict between the application thresholds between the exposure draft and a recently released exposure draft on compensation, retirement benefits and multiemployer plans. For example, if a contractor/issuer were a participant in a multiemployer plan, it would be difficult for the entity to know if a withdrawal liability posed a severe impact to its financial condition, as such information may not available be in a timely fashion.  
• Consideration of insurance recoveries:  The proposed amendments would not allow companies to consider insurance recoveries or other indemnification arrangements when assessing the materiality of loss contingencies. Commenters have expressed concern that omitting potential recoveries would be misleading to users.  
• Additional qualitative and quantitative disclosures:  The proposed amendments would enhance disclosures to include the following additional information:
• Contentions of parties involved in litigation
• How financial statement users can obtain additional information about the litigation
• Publicly available quantitative information (such as the claim amount for asserted litigation)
• Other relevant non-privileged information, including information about possible recoveries from insurance or other sources

Additional disclosures might be considered prejudicial by the client’s counsel. As noted in one comment, a company may be placed in the difficult position of choosing between the risk of creating economic losses from disclosure of potentially prejudicial information or the risk of possible qualification of its audit opinion.

• Additional public company disclosures:  Registrants would be required to disclose tabular reconciliations, by class, of recognized (accrued) loss contingencies that present the activity in the respective account during the financial statement reporting period.

These concepts present interesting questions and potential implementation challenges, several of which would uniquely impact the construction and real estate industries. After further deliberation, FASB plans to reconvene in 2011. At that time, the board may make changes, if deemed necessary, to the proposed amendments and determine a revised effective date. 

For more information on this topic, please contact your BKD advisor.