Loss contingency accounting and disclosures continue to be a focus for both accounting standard setters and regulators. In response to perceived shortfalls in both the quality and timing of loss contingency accruals and disclosures, the Financial Accounting Standards Board (FASB) released two exposure drafts on this topic; one in 2007 and another in 2010. The FASB's intent is to improve the disclosure and transparency regarding contingencies, which can be significant cash flow events, because investors and regulators believe that financial statements preparers often do not provide timely and transparent information regarding the status of loss contingencies and their possible outcomes. The main criticism is that financial statement disclosures are silent regarding possible outcomes until the contingency is actually settled.

While some support has been voiced by the financial and accounting communities for the FASB initiative, many comment letters received by the FASB on the exposure drafts clearly indicated that accounting professionals, attorneys, auditors and others within the financial statement user community have a number of concerns in this area. Many comment letters questioned whether the cause of the concerns expressed by financial statement users might be the improper application and enforcement of the existing standard.

In October 2010, the SEC staff issued communications via "Dear CFO" letters to remind companies to be aware of the disclosure requirements in this area. Additionally, the SEC has made loss contingencies a focus area in their public speeches and in their review of public filings. In response, the FASB decided to delay further rule making in this area while observing the impact of the SEC 's efforts to improve loss contingency disclosures.

A key factor impacting the timing of loss accruals and transparency of disclosures is the December, 1975, American Bar Association's Statement of Policy Regarding Lawyer's Responses to Auditors' Requests for Information ("the treaty") which outlines the basis of communications between attorneys and auditors relating to legal contingencies. One objective of "the treaty" is to preserve the attorney/client privilege. Attorneys are concerned that financial statement disclosure for litigation contingencies could be used against a company by opposing counsel, or in arbitration proceedings. Therefore, it is common for financial statement preparers, and their attorneys, to resist the disclosure of any information that could be perceived as compromising their position in legal arguments or arbitration. This is often in conflict with the required timing for recording a loss contingency accrual, as well as providing useful disclosures as required by Generally Accepted Accounting Principals (GAAP). The established practice of attorneys limiting information provided, regarding communication of contingencies to auditors, is contrary to the goal of relevant and transparent financial reporting. Both standard setters and regulators understand the necessity of protecting the attorney client privilege; however, neither believes this is an excuse for not complying with the disclosure requirements of U.S. GAAP.

There is currently a perception of noncompliance with the existing standard. The existing standard requires a company to make several judgments, including assessing the probable outcome of the contingency and accruing an estimate of the ultimate loss should a negative outcome be assessed as probable. The standard also requires disclosure of a range of possible outcomes when an accrual for a contingency has not been recorded, unless an estimate cannot be made.

When the standard was established, it was expected that instances in which an estimate cannot be made would be uncommon. However, companies have routinely not included an estimated range or other required information about the contingency under the guise that a reasonable estimate cannot be made. In addition, companies who record an accrual often do not disclose that an accrual was recorded, despite the requirement that disclosure of such accrual is required. It is only the disclosure of the amount of the accrual that is not required, unless necessary, to prevent the financial statements from being misleading.

Companies should consider the accrual of loss contingencies and disclosures in respect to the requirements of ASC 450, and ensure the accounting is both appropriate and transparent. There is a widely held perception that companies and their auditors often read accounting standards for the minimum requirements, and for ways to avoid disclosure, rather than to determine the disclosures necessary to best communicate the financial condition and operations of the entity.

The SEC has made public its plans to monitor compliance with the existing requirements of GAAP to determine if the perceived short falls in reporting by companies is a result of the misapplication of the current requirements within GAAP, or shortcomings in the existing standards themselves. The FASB has indicated it will continue to monitor the efforts of the SEC in the early part of 2011, and consider those findings in its decision to revisit the exposure draft. If companies and their auditors consider the concerns of the FASB and the SEC , perhaps the goal of transparent financial reporting can be achieved without new standards or regulations.