After nearly five years of proposals, feedback, and increased enforcement, the Financial Accounting Standards Board is shutting down its dormant project to write a new accounting standard for loss contingencies.
The board voted 5-2 during a regular board meeting to remove from its technical agenda its project on disclosures about certain loss contingencies, concluding the existing accounting standard that dates back to 1975 is adequate. “As a result of the increased scrutiny of loss contingency disclosures in recent years, the Board concluded that improvements to financial reporting are more likely to be achieved through robust compliance than through additional standard setting,” said FASB Chairman Leslie Seidman in a written statement.
Contingencies are unresolved issues, especially lawsuits or environmental clean-ups, that represent liabilities on the balance sheet. Accounting Standards Codification Topic 450: Contingencies require companies to disclosure in their financial statements when they are facing such possible liabilities, and to state or estimate what the final cost will be if it can be determined. The board began its journey to develop a new accounting standard for loss contingencies in 2007 when investors told the board they too often are surprised by large settlements of legal issues with little or no forewarning in financial statements.
The board published a proposal in 2008 and a revised proposal in 2010 to call for more disclosure and more estimation of possible losses, both of which met heavy resistance. Corporate legal counsel in particular said the disclosures would compromise an entity's ability to make its case against its adversary and would prejudice the outcome of pending proceedings. FASB turned to the Securities and Exchange Commission and asked for more focus on existing requirements to see if the concerns could be resolved by tighter enforcement of existing standards. The board put the project on the back burner to watch the enforcement process and its effect.
SEC staff began scrutinizing disclosures, especially those describing settlements or nearly resolved contingencies where companies provided few clues to pending issues in earlier period financial statements. The staff also called on companies to provide more estimation of the possible liabilities associated with a particular contingency, or more explanation for why such estimation might not be possible. In recent months, SEC staff have reported improvements in contingency disclosures under the increased enforcement focus.