1.2 History of Guidance on Contingencies
FASB Statement 5 established an accounting and reporting framework
for loss contingencies and carried forward the conclusions of ARB 50 with respect to
gain contingencies and other disclosures. In 1976, the FASB clarified the use of a
range as part of the estimation of a contingent liability in FASB Interpretation
14.
In July 2010, the FASB issued a proposed ASU that would have amended the ASC 450 disclosure
requirements for loss contingencies in response to concerns raised by investors and
users of financial reporting that disclosures about loss contingencies under the
existing guidance in ASC 450 did not provide adequate and timely information to help
them assess the likelihood, timing, and amount of future cash outflows associated
with such contingencies. In particular, the proposed ASU stated that “[d]isclosure
of asserted but remote loss contingencies may be necessary, due to their nature,
potential magnitude, or potential timing (if known) to inform users about the
entity’s vulnerability to a potential severe impact.” Further, the proposed ASU
stated that “[t]his proposed change in the disclosure threshold would expand 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.”
The FASB did not proceed with finalizing the proposed ASU after considering the
comments received but directed the FASB staff to work with the SEC and PCAOB staffs
to understand their efforts to address investors’ concerns about the disclosure of
certain loss contingencies through increased focus on compliance with existing
rules. In July 2012, the Board ultimately decided to remove the project on
disclosures of certain loss contingencies from its technical agenda. Given the
concerns expressed by investors and users, compliance with the disclosure
requirements of ASC 450 historically has been and continues to be an area of focus
by the SEC staff in its review of a registrant’s periodic filings.
ASC Master Glossary
Contingency
An existing condition, situation, or set of
circumstances involving uncertainty as to possible gain
(gain contingency) or loss (loss contingency) to an entity
that will ultimately be resolved when one or more future
events occur or fail to occur.
Loss Contingency
An existing condition, situation, or set of
circumstances involving uncertainty as to possible loss to
an entity that will ultimately be resolved when one or more
future events occur or fail to occur. The term loss is used
for convenience to include many charges against income that
are commonly referred to as expenses and others that are
commonly referred to as losses.
Contingent liabilities are liabilities for which the possible loss
outcome is unknown or uncertain, such as those associated with pending litigation.
The likelihood that a liability has been incurred ranges from “remote” to
“reasonably possible” to “probable.” The ASC master glossary’s definitions of these
terms provide no quantitative thresholds; accordingly, entities need to exercise
judgment when applying the terms.
ASC Master Glossary
Probable
The future event or events are likely to
occur.
Reasonably
Possible
The chance of the future event or events
occurring is more than remote but less than likely.
Remote
The chance of the future event or events
occurring is slight.
A gain contingency also includes characteristics of uncertainty but
differs from a loss contingency in that the resolution of the uncertainty could
potentially result in a gain. The recognition threshold for a gain contingency is
substantially higher than that of a loss contingency.
ASC Master Glossary
Gain Contingency
An existing condition, situation, or set of
circumstances involving uncertainty as to possible gain to
an entity that will ultimately be resolved when one or more
future events occur or fail to occur.
Chapter
2 provides an overview of the scope, recognition, measurement, and
disclosure requirements for loss contingencies, along with certain interpretive
guidance on accounting for loss contingencies. Chapter 3 provides similar information in the
context of gain contingencies. See Chapter 4 for guidance on how to apply the loss recovery model to a
recognized loss and possible recovery proceeds.
Because the accounting for a contingency involves the evaluation of
the likelihood of occurrence or nonoccurrence of a future event that may confirm a
previous loss, impairment of an asset, or incurrence of a liability, contingencies
may be at risk for being overlooked for recognition or disclosure purposes. It is
important to disclose certain contingencies, even those that are not recognized, so
that financial statement users can understand an entity’s risks and how they could
potentially affect the financial statements.
Management should have processes in place to capture, evaluate, and
document the recognition, measurement, and disclosure of contingencies. Entities
should thoroughly document key judgments, the completeness and the accuracy of
information used in reaching those judgments (including contradictory information,
if any), and their support for any significant assumptions. In addition, when
management engages a specialist or expert, management retains overall responsibility
for overseeing the specialist’s or expert’s activities and for the resulting
product, including ownership of the amounts determined by the engaged specialist or
expert as well as the design, implementation, and maintenance of internal control
over financial reporting (ICFR).