On Wednesday, 11am ET, FASB Fellow David Elsbree will be joining us to talk about a few of the projects he is overseeing. Details about office hours are here.  One likely to be of interest to many of you is the Disclosure of Certain Loss Contingencies.  My initial objection to the project is the title, which sounds as if FASB is proposing to account for contingent losses that are certain to happen.  (I would have preferred ‘various’ loss contingencies–they need the qualifier because they are excluding asset impairments, FAS 45 guarantees, and a variety of insurance and employment benefits).

But naturally, lawyers and preparers have more substantive concerns, which you can read about below the fold.

One key change is described in Para A16:

The Board decided not to retain the disclosure exemption that if an amount cannot be reasonably estimated, an entity would not have to provide an amount in the disclosure but, instead, would provide the reasons why an estimate cannot be made.  Financial statement users indicated that this exemption in Statement 5 is used with such regularity that rarely does any quantitiatve information accompany loss contingency disclosures.  They prefer to have a highly uncertain estimate supplemented with a qualitative description than no quantification of a potential loss as commonly occurs in existing practice.

If you look at the comment letter from CFA Institute, the Board seems to have captured the user’s perspective accurately, and the new standard actually proposes a tabular format with a good deal of detail on the contingencies–far more disclosure than we would have seen under FAS 5.

But many lawyers also commented (see the entire list here).  The comment of Lawyers for Civil Justice seems pretty typical, noting that ‘litigation creates unique loss contingencies’ and more or less requesting that such contingencies not be disclosed in much detail.

The FASB responds to this familiar concern by allowing a degree of aggregation sufficient to eliminate any self-prejudicial disclosures (see A25), and also allowing for nondisclosure in the “rare” circumstance when aggregation does not provide sufficient protection.  (But they don’t go as far as the IASB, which in IAS 37 used the term “extremely rare.”  Leave it to the accountants to devote two paragraphs (A28-A29) to summarize a debate on the word “extremely”!

Even those with a passing interest in this topic will enjoy reading Roman Weil’s comment, which is both informative and entertaining.  His basic summary is that the IASB has it right, and the FASB should not expend its political capital on this issue: “Save it for changing FAS 5′s underlying principles from recognition based on probability thresholds to fair values.”

Join us for what promises to be an interesting discussion.

p.s.  David has also been in charge of the Emissions Trading Schemes project, which is temporarily on hold.  However, ‘cap and trade’ for carbon emissions is likely to be a politically charged issue this year (since it was proposed in the pending energy bill before Congress), so I, for one, am looking forward to getting a little more insight into its likely accounting implications.