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:
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Lack of specificity regarding the nature of the matter.
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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.
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Insufficient detail about judgments and assumptions underlying significant accruals.
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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.
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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
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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.
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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:
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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.
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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.
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- 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.
- We note your disclosure regarding the . . . claims that the litigation trust filed against you and certain of your current and former officers and directors relating to [Matter A]. . . .Please expand your disclosure to specify your estimate of reasonably possible loss or the range of reasonably possible loss pertaining to this matter. If you have not prepared an estimate and are unable to estimate such amount or range, you must include a statement that such an estimate cannot be made to comply with FASB ASC 450-20-50-3 and 4. If this is the case, disclose the amount of damages that are being sought and which have been quantified, and identify any aspects of the litigation for which the amount of damages claimed remain unspecified. Also revise your disclosure to conform to the terminology guidance in FASB ASC 450-20-50-1, or clarify your reserve reference.
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
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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.
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