Investors and other users of financial information have expressed concerns that current disclosures required by FASB Statement No. 5, Accounting for Contingencies, do not provide sufficient information in a timely manner to assist users of financial statements in assessing the likelihood, timing, and amount of future cash flows associated with loss contingencies.  Therefore, the Financial Accounting Standards Board (FASB) has issued an Exposure Draft of a proposed Statement, Disclosure of Certain Loss Contingencies - an amendment of FASB Statements No. 5 and 141(R), which would expand disclosures about certain loss contingencies in the scope of FASB Statement No. 5 or FASB Statement No. 141 (revised 2007), Business Combinations.

This proposed Statement would replace the disclosure requirements in Statement No. 5 for loss contingencies that are recognized as liabilities in a statement of financial position and for unrecognized loss contingencies that would be recognized as liabilities if the criteria for recognition in Statement No. 5 were met (i.e., it is probable that a liability has been incurred and the amount of loss can be reasonably estimated).  This proposed Statement also would apply to loss contingencies recognized in a business combination accounted for under Statement No. 141(R).  It would not change the disclosure requirements for loss contingencies that are or would be recognized as asset impairments.

The disclosure objective of the proposed Statement is that an entity is to provide disclosures to assist users of financial statements in assessing the likelihood, timing, and amount of future cash flows associated with loss contingencies that are, or would be, recognized as liabilities in a balance sheet.  Those disclosures should include information about the risks those loss contingencies pose to the entity and their potential and actual effects on the entity’s financial position, results of operations, and cash flows.  To achieve this objective, an entity must disclose:

1. Quantitative information about the entity’s exposure to loss from the contingency, excluding any potential recoveries (i.e., the amount of the claim or assessment against the entity or, if there is no claim or assessment amount, the entity’s best estimate of the maximum exposure to loss).
2. Qualitative information about the contingency sufficient to enable users to understand the risks posed to the entity. This information must include a description of the contingency, including how it arose, its legal or contractual basis, its current status, and the anticipated timing of its resolution; a description of the factors that are likely to affect the ultimate outcome of the contingency along with their potential effect on the outcome; the entity’s qualitative assessment of the most likely outcome of the contingency; and significant assumptions made by the entity in estimating the amounts disclosed in paragraph a. above and in assessing the most likely outcome.
3. 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 loss.

The proposed Statement provides certain relief from the disclosures in those rare instances where disclosures about the contingency may be prejudicial to an entity’s position.

Also, for each period for which a statement of income is presented, an entity must provide a reconciliation, in tabular format, of the total amount recognized in the aggregate for loss contingencies in its statement of financial position at the beginning and end of the period.  This reconciliation must include increases for loss contingencies recognized during the period, increases resulting from changes in estimates of the amounts of loss contingencies previously recognized, decreases resulting from changes in estimates or derecognition of loss contingencies previously recognized, and decreases resulting from cash payments (or other forms of settlement) for loss contingencies.

The proposed Statement would be effective for fiscal years ending after December 15, 2008, and interim and annual periods in subsequent fiscal years.  The Exposure Draft is available for comment until August 8, 2008 at http://www.fasb.org/draft/ed_contingencies.pdf.

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