Disclosures under ASC 450, Contingencies

The SEC’s Division of Corporation Finance has continued to express concerns regarding the required financial statement disclosures under FASB Accounting Standards Codification (ASC) Topic 450, Contingencies. Specifically, the SEC has noticed that some companies are not providing information about reasonably possible losses, including not providing quantified information. The standard requires a company to disclose the amount or range of a reasonably possible loss or to indicate that an amount cannot be estimated. The objective of the disclosure is not to address what is accrued on the balance sheet, but what is not accrued for which it is reasonably possible that there is a loss.

There are three ways companies can comply with the disclosure requirement for reasonably possible losses:

• Disclose the amount or range of reasonably possible losses in addition to the amount accrued.
• Disclose that any such amount in addition to the amount accrued is not material to the financial statements. This is a form of quantification. However, many companies will disclose that it would not be material to the balance sheet, but could be material to the income statement and/or statement of cash flows. Such disclosure does not satisfy the requirement to provide quantified information or to make a statement that an amount cannot be estimated.
• Disclose that the amount cannot be estimated. It should be noted, however, that it is not acceptable for a company to conclude that an amount cannot be estimated because management has not made the effort to make the estimate. The company should continuously evaluate its ability to estimate the amount or range of reasonably possible losses. With the passage of time, an assertion of an inability to estimate is more likely to be questioned by the SEC.

The appropriateness of the disclosure for reasonably possible losses will be based upon the specific fact pattern. However, with respect to the disclosure, the SEC generally has:

• Not objected to companies disclosing the amount or range of reasonably possible loss on an aggregate basis;
• Not objected to companies disclosing the amount or range of reasonably possible losses in certain cases and indicating that they cannot estimate an amount for others;
• Required companies, when applicable, to disclose that they cannot estimate the amount or range of reasonable possible losses;
• Objected to companies asserting that the term possible includes all three categories – probable, reasonably possible, and remote - and providing an aggregated disclosure that combines all categories, which is not appropriate; and
• Objected to companies asserting that they could not provide quantified information of reasonably possible losses because it could not be estimated with confidence or with precision.