Chapter 2 — Financial Statement Accounting and Disclosure Topics

2.3 Contingencies

The SEC staff continues to closely monitor registrants’ contingency disclosures, and it comments when such disclosures do not comply with U.S. GAAP or SEC rules and regulations.

The staff frequently comments on:

Lack of specificity regarding the nature of the matter.
Lack of quantification of amounts accrued, if any, and possible loss or range of loss and/or disclosure about why such an estimate cannot be made.
Insufficient detail about judgments and assumptions underlying significant accruals.
Unclear language in disclosures (e.g., not using terms that are consistent with accounting literature, such as “probable” or “reasonably possible”) and failure to consider the disclosure requirements of ASC 450, SAB Topic 5.Y, and Regulation S-K, Item 103.
Lack of disclosure of an accounting policy related to accounting for legal costs (when material) and uncertainties in loss contingency recoveries, including (1) whether ranges of reasonably possible losses are disclosed gross or net of anticipated recoveries from third parties, (2) risks regarding the collectibility of anticipated recoveries, and (3) the accounting policy for uncertain recoveries.

2.3.1 Loss Contingencies

Examples of SEC Comments

We note your disclosure that there can be no assurance that your legal proceedings, either individually or in the aggregate, will not have a material adverse effect on your business, results of operations, financial condition or cash flows. To the extent it is reasonably possible you will incur losses in excess of recorded accruals related to your contingencies, please provide the applicable disclosures required by ASC 450-20-50-3 through -4, including the amount or range of reasonably possible losses in excess of recorded amounts. . . . Although we recognize that there are a number of uncertainties and potential outcomes associated with loss contingencies, please note that ASC 450 does not require estimation of a reasonably possible range of loss with precision or certainty.
You disclose that as of any given date you could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. Please revise to clarify for all matters whether you believe there [is] at least a reasonable possibility that a loss may have been incurred or incurred in excess of amounts already accrued and if so, disclose an estimate of such loss or a range of loss or state that such estimate of possible losses cannot be made. Refer to ASC 450-20-50-4.
We note your disclosure . . . that the amount of your asbestos litigation liability and its effect on the company could differ materially from current estimates. Please address the following comments related to your asbestos litigation:
- To the extent it is reasonably possible you will incur losses in excess of the amount accrued, provide the applicable disclosures required by ASC 450-20-50-3 through -4, including the amount or range of reasonably possible losses in excess of recorded amounts. Alternatively, if no amount of loss in excess of recorded accruals is believed to be reasonably possible, please state this in your disclosure.
- If you conclude that you cannot estimate the reasonably possible additional loss or range of loss, please explain to us in sufficient detail the reasons for your determination. Although we recognize that there are a number of uncertainties and potential outcomes associated with loss contingencies, ASC 450 does not require estimation of a reasonably possible range of loss with precision or certainty. An effort should be made to develop estimates for purposes of disclosure, including determining which of the potential outcomes are reasonably possible and what the reasonably possible range of losses would be for those reasonably possible outcomes.
With respect to the cyber-security incident and related assessments and litigation, please tell us your consideration of the requirement in ASC 450-20-50-4.b. to disclose an estimate of the possible loss or range of loss or to disclose that such an estimate cannot be made.

The SEC staff often asks about estimates of reasonably possible losses or comments when a registrant omits disclosure of a loss or range of losses because its estimates lack precision and confidence. If an estimate of the loss or range of losses cannot be made, the staff expects registrants to (1) disclose, in accordance with ASC 450-20-50-4, that such an estimate cannot be made and (2) demonstrate that they at least attempted to estimate the loss or range of losses before concluding that an estimate cannot be made. In such cases, the staff has commented that registrants should disclose the specific factors that limited their ability to reasonably estimate the loss or range of losses and has asked about registrants’ quarterly procedures related to such estimates. The factors disclosed should be specific to the loss contingency in question and could include representations that (1) claims do not specify an amount of damages, (2) there are a large number of plaintiffs, or (3) the case is in its early stages.

If a registrant discusses a potential contingency in its earnings calls, the SEC staff is likely to seek more information about the contingency and to inquire about whether the related disclosures are appropriate. The staff encourages registrants to clearly disclose the “full story” regarding their loss contingencies because recognition of such contingencies requires a high degree of professional judgment.

Further, the staff has noted that disclosures related to loss contingencies should be continually evaluated over time as facts and circumstances change. In addition to being required to provide the primary disclosures under ASC 450-20, an entity must provide certain additional disclosures under ASC 275 when it is reasonably possible that a change in estimate will occur in the near term. For discussion of the disclosure requirements under ASC 450-20 and ASC 275, see Section 2.8.1 of Deloitte’s Roadmap Contingencies, Loss Recoveries, and Guarantees.

The SEC staff may also ask about (1) the basis for a registrant’s accrual (e.g., factors supporting an accrual, such as trends in claims received and rejected), (2) the timing of a loss contingency’s recognition, and (3) the disclosure of a loss contingency. In addition, when a material settlement is disclosed during the period, the staff may review prior-period disclosures to determine whether such disclosures were appropriate (i.e., whether the registrant should have provided early-warning disclosures about the possibility of incurring or settling a loss in future periods to help financial statement users understand these risks and how they could potentially affect the financial statements) or whether an accrual should have been recognized in a prior period. See Section 3.1 for additional information about early-warning disclosures.

2.3.2 Litigation Contingencies

In addition to complying with ASC 450, when disclosing litigation matters, public entities must separately meet the requirements of Regulation S-K, Item 103, because while those requirements are similar to the requirements of ASC 450, they are not identical. Item 103 requires disclosure of an environmental proceeding to which the government is a party if the proceeding is generally expected to result in sanctions of $300,000 or more. However, a registrant may elect an alternative higher threshold if the registrant determines that such threshold is more reasonably designed to result in the disclosure of material environmental proceedings. If so, the alternative higher threshold is limited to the lesser of $1 million or 1 percent of the current assets of the registrant and its subsidiaries on a consolidated basis. A registrant must disclose this alternative threshold in each annual and quarterly report. Also, to address potential concerns related to a registrant’s assertion that providing too much information may be detrimental to litigation or settlement efforts, the SEC staff has indicated that registrants do not need to separately disclose each asserted claim; rather, asserted claims may be aggregated in a logical manner as long as the disclosure complies with ASC 450.

Connecting the Dots

SEC rules and regulations permit the use of hyperlinks or cross-references to disclosures about legal proceedings that were included elsewhere in the document (e.g., in the financial statement footnotes). However, registrants may not make reference from the financial statements (e.g., the financial statement footnotes) to other areas outside of the financial statements (e.g., Item 103) to satisfy financial statement disclosure requirements (unless permitted by the SEC’s rules or the applicable accounting standards).

2.3.3 Asset Retirement Obligations

Examples of SEC Comments

Provide us with your analysis of your asset retirement obligation related to the environmental remediation, decommissioning or retirement of your [X] facility in [Country A]. Please also provide us with your analysis of your asset retirement obligations at your other properties and how you assessed materiality for your asset retirement obligations. Refer to ASC 410.
Please tell us your consideration of recording asset retirement obligations in connection with the future removal of gasoline tanks from your gasoline stations. Refer to ASC 410.
We note your disclosures . . . regarding the challenges faced by your nuclear generating stations and the resulting potential for early retirement or shutdown of the [Facility 1] and [Facility 2] nuclear units, as well as your disclosure that [Segment A] recorded an increase to its [asset retirement obligation (ARO)] liabilities primarily due to a higher assumed probability of early retirement of its nuclear units. Please tell us your consideration of providing additional critical accounting policy disclosure that allows for an assessment of the probability, magnitude and timing of future material charges associated with early retirement or shutdown of these units, along with a description of the specific events and/or changes in circumstances that could reasonably be expected to result in early retirement or shutdown.

The SEC staff may ask about a registrant’s legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and normal operation of such assets. Accordingly, a registrant should carefully evaluate whether, as a result of assets capitalized as long-lived assets, there are AROs under ASC 410-20-15-2. Further, the staff may ask a registrant how it may be affected by changes to existing AROs. If a material impact is expected, the staff may ask the registrant to disclose the potential impact and the associated uncertainty.

Other Deloitte Resources

Roadmap, Environmental Obligations and Asset Retirement Obligations