Page 1
Results 1.
FR 3 2 8 4 3 R U T R S a n c i R f ^ a n l a h i n n s , R F m P T T T R q a w n ^T^^^RarJr;R m M M T C Q T o w iQvr) n rpp P a r t 2 1 1 , [Release No. SAB 9 2 ] , S t a f f A c c o u n t i n g B u l l e t i n No. 9 2 , Monday, June 1 4 , 1 9 9 3 , ACTION: P u b l i c a t i o n o f s t a f f a c c o u n t i n g b u l l e t i n . , FEDERAL REGISTER VOL. 5 8 , No. 1 1 2 FEDERAL REGISTER VOL. 5 8 , No. 1 1 2 58
ACC-941
A
n EXHIBIT
I. MOSKOWITZ
Page 2
Return
to List 1 o f 1 DOCUMENT FEDERAL REGISTER VOL. 5 8 , No. 112 Rules and Regulations SECURITIES AND EXCHANGE COMMISSION (SEC) 17 CFR P a r t 211 [ R e l e a s e No. SAB 92] S t a f f A c c o u n t i n g B u l l e t i n No. 92 58 FR 32843
DATE: Monday, J u n e 1 4 ,
1993
ACTION: P u b l i c a t i o n o f s t a f f
To v i e w To v i e w
accounting
bulletin.
t h e n e x t p a g e , t y p e .np* TRANSMIT. a s p e c i f i c p a g e , t r a n s m i t p * a n d t h e p a g e number,
e.g. p * l
E*32843] SUMMARY: The i n t e r p r e t a t i o n s i n t h i s s t a f f a c c o u n t i n g b u l l e t i n e x p r e s s c e r t a i n views o f t h e s t a f f r e g a r d i n g accounting and d i s c l o s u r e s r e l a t i n g t o l o s s c o n t i n g e n c i e s . The g u i d a n c e i n t h i s S t a f f A c c o u n t i n g b u l l e t i n i s i n t e n d e d t o promote t i m e l y r e c o g n i t i o n o f c o n t i n g e n t losses a n d t o address t h e d i v e r s i t y i n p r a c t i c e w i t h r e s p e c t t o accounting and d i s c l o s u r e s i n t h i s area.
E F F E C T I V E DATE: J u n e 8,
1993.
FOR FURTHER INFORMATION CONTACT: R a n d a l l L a r s o n , O f f i c e o f t h e C h i e f Accountant (202-272-2130), o r K u r t Hohl, D i v i s i o n o f C o r p o r a t i o n Finance ( 2 0 2 - 2 7 2 - 2 5 5 3 ) , S e c u r i t i e s a n d E x c h a n g e C o m m i s s i o n , 450 F i f t h S t r e e t NW., W a s h i n g t o n , DC 2 0 5 4 9 .
SUPPLEMENTARY INFORMATION: The s t a t e m e n t s i n s t a f f a c c o u n t i n g b u l l e t i n s a r e n o t r u l e s o r i n t e r p r e t a t i o n s o f t h e Commission n o r a r e t h e y p u b l i s h e d as b e a r i n g t h e Commission's o f f i c i a l a p p r o v a l . They r e p r e s e n t i n t e r p r e t a t i o n s and p r a c t i c e s f o l l o w e d by t h e D i v i s i o n o f C o r p o r a t i o n Finance and t h e O f f i c e o f t h e Chief Accountant i n a d m i n i s t e r i n g t h e d i s c l o s u r e requirements o f t h e Federal s e c u r i t i e s laws.
Page 3 58
J o n a t h a n G.
FR 32843, *32843
Katz,
Secretary. A c c o r d i n g l y , p a r t 2 1 1 o f t i t l e 17 o f t h e Code o f F e d e r a l R e g u l a t i o n s i s amended b y a d d i n g S t a f f A c c o u n t i n g B u l l e t i n No. 92 t o t h e t a b l e f o u n d i n S u b p a r t B. Staff Accounting
B u l l e t i n No. 92
The s t a f f h e r e b y adds S e c t i o n Y t o T o p i c 5 o f t h e S t a f f A c c o u n t i n g B u l l e t i n S e r i e s . T o p i c 5-Y p r o v i d e s g u i d a n c e r e g a r d i n g t h e a c c o u n t i n g a n d d i s c l o s u r e s r e l a t i n g t o l o s s c o n t i n g e n c i e s . I n a d d i t i o n , t h e s t a f f h e r e b y adds Q u e s t i o n 7 t o T o p i c 2-A a n d adds S e c t i o n F t o T o p i c 1 0 . Q u e s t i o n 7 o f T o p i c 2-A d i s c u s s e s l o s s c o n t i n g e n c i e s assumed i n a b u s i n e s s c o m b i n a t i o n a c c o u n t e d f o r as a p u r c h a s e . T o p i c 10-F d i s c u s s e s t h e p r e s e n t a t i o n b y u t i l i t y c o m p a n i e s o f l i a b i l i t i e s f o r environmental costs. T o p i c 5: M i s c e l l a n e o u s
Accounting
* * * * * Y. A c c o u n t i n g
disclosures relating t o loss contingencies:
Facts: A r e g i s t r a n t b e l i e v e s i t may be o b l i g a t e d t o p a y m a t e r i a l a m o u n t s as a r e s u l t o f p r o d u c t o r e n v i r o n m e n t a l l i a b i l i t y . T h e s e a m o u n t s may r e l a t e t o , f o r e x a m p l e , damages a t t r i b u t e d t o t h e r e g i s t r a n t ' s p r o d u c t s o r p r o c e s s e s , clean-up o f h a z a r d o u s w a s t e s , r e c l a m a t i o n c o s t s , f i n e s , a n d l i t i g a t i o n c o s t s . The r e g i s t r a n t may s e e k t o r e c o v e r a p o r t i o n o r a l l o f t h e s e a m o u n t s b y f i l i n g a c l a i m a g a i n s t an i n s u r a n c e c a r r i e r o r o t h e r t h i r d p a r t i e s . P a r a g r a p h 8 o f S t a t e m e n t of Financial Accounting Standards No. 5, " A c c o u n t i n g f o r C o n t i n g e n c i e s , " ("SFAS 5") s t a t e s t h a t a n e s t i m a t e d l o s s f r o m a l o s s c o n t i n g e n c y s h a l l be a c c r u e d b y a c h a r g e t o income i f i t i s p r o b a b l e t h a t a l i a b i l i t y h a s b e e n i n c u r r e d a n d t h e amount o f t h e l o s s c a n be r e a s o n a b l y e s t i m a t e d . The E m e r g i n g I s s u e s T a s k F o r c e ("EITF") o f t h e F i n a n c i a l A c c o u n t i n g S t a n d a r d s B o a r d r e a c h e d a consensus on EITF I s s u e 93-5, " A c c o u n t i n g f o r E n v i r o n m e n t a l L i a b i l i t i e s , " t h a t an e n v i r o n m e n t a l l i a b i l i t y s h o u l d be e v a l u a t e d i n d e p e n d e n t l y f r o m any p o t e n t i a l c l a i m f o r r e c o v e r y . Under t h a t consensus, any l o s s a r i s i n g f r o m t h e r e c o g n i t i o n o f an e n v i r o n m e n t a l l i a b i l i t y s h o u l d be r e d u c e d b y a p o t e n t i a l c l a i m f o r r e c o v e r y o n l y when t h a t c l a i m i s p r o b a b l e n l o f r e a l i z a t i o n . The E I T F a l s o r e a c h e d a c o n s e n s u s t h a t d i s c o u n t i n g a n e n v i r o n m e n t a l l i a b i l i t y f o ra s p e c i f i c clean-up s i t e t o r e f l e c t t h e time value o f [*32844] money i s a p p r o p r i a t e o n l y i f t h e a g g r e g a t e amount o f t h e o b l i g a t i o n a n d t h e amount a n d t i m i n g o f t h e c a s h p a y m e n t s a r e f i x e d o r r e l i a b l y d e t e r m i n a b l e f o r t h a t s i t e . F u r t h e r , any asset t h a t i s r e c o g n i z e d r e l a t i n g t o a c l a i m f o r r e c o v e r y o f a l i a b i l i t y t h a t i s r e c o g n i z e d o n a d i s c o u n t e d b a s i s a l s o s h o u l d be d i s c o u n t e d t o r e f l e c t t h e t i m e v a l u e o f money
nl
Paragraph
3 o f SFAS
5 defines
probable
as
"likely
to
occur."
Because u n c e r t a i n t y r e g a r d i n g t h e a l t e r n a t i v e methods o f p r e s e n t i n g i n t h e
Page 4 58
FR 32843, *32844
b a l a n c e s h e e t t h e a m o u n t s r e c o g n i z e d as c o n t i n g e n t l i a b i l i t i e s a n d c l a i m s f o r r e c o v e r y f r o m t h i r d p a r t i e s was n o t r e s o l v e d b y t h e E I T F a n d c u r r e n t d i s c l o s u r e p r a c t i c e s remain d i v e r s e , t h e s t a f f i s p u b l i s h i n g i t s i n t e r p r e t a t i o n o f t h e c u r r e n t a c c o u n t i n g l i t e r a t u r e a n d d i s c l o s u r e r e q u i r e m e n t s t o s e r v e as g u i d a n c e f o r p u b l i c c o m p a n i e s . The AICPA's A c c o u n t i n g S t a n d a r d s E x e c u t i v e C o m m i t t e e h a s a p p o i n t e d a t a s k f o r c e t o a d d r e s s e n v i r o n m e n t a l c o n c e r n s . The s t a f f e n c o u r a g e s e f f o r t s by t h e p r o f e s s i o n t o develop comprehensive guidance a p p l i c a b l e t o t h e a c c o u n t i n g and f i n a n c i a l s t a t e m e n t d i s c l o s u r e s r e l a t i n g t o e n v i r o n m e n t a l matters. Question 1: Does t h e s t a f f b e l i e v e t h a t i t i s a p p r o p r i a t e t o o f f s e t i n t h e balance sheet a c l a i m f o r r e c o v e r y t h a t i s probable o f r e a l i z a t i o n a g a i n s t a p r o b a b l e c o n t i n g e n t l i a b i l i t y , t h a t i s , r e p o r t t h e t w o as a s i n g l e n e t amount o n the f a c e o f t h e balance sheet? I n t e r p r e t i v e Response: N o t o r d i n a r i l y . The s t a f f b e l i e v e s t h a t s e p a r a t e p r e s e n t a t i o n o f t h e g r o s s l i a b i l i t y and r e l a t e d c l a i m f o r r e c o v e r y i n t h e b a l a n c e s h e e t most f a i r l y p r e s e n t s t h e p o t e n t i a l consequences o f t h e c o n t i n g e n t c l a i m o n t h e company's r e s o u r c e s a n d i s t h e p r e f e r a b l e m e t h o d o f d i s p l a y . R e c e n t r e p o r t s o f l i t i g a t i o n over insurance p o l i c i e s ' coverage o f p r o d u c t and e n v i r o n m e n t a l l i a b i l i t i e s and f i n a n c i a l f a i l u r e s i n t h e i n s u r a n c e i n d u s t r y i n d i c a t e t h a t t h e r e a r e s i g n i f i c a n t u n c e r t a i n t i e s r e g a r d i n g b o t h t h e t i m i n g and t h e u l t i m a t e r e a l i z a t i o n o f c l a i m s made t o r e c o v e r a m o u n t s f r o m i n s u r a n c e c a r r i e r s a n d o t h e r t h i r d p a r t i e s . The r i s k s a n d u n c e r t a i n t i e s a s s o c i a t e d w i t h a r e g i s t r a n t ' s c o n t i n g e n t l i a b i l i t y a r e separate and d i s t i n c t from those associated w i t h i t s c l a i m f o rrecovery from t h i r d p a r t i e s . Separate p r e s e n t a t i o n o f t h e gross l i a b i l i t y and t h e c l a i m f o r r e c o v e r y i s c o n s i s t e n t w i t h t h e r e c e n t consensus o f t h e EITF, w h i c h c o n c l u d e d t h a t t h e amounts o f t h e c o n t i n g e n t l i a b i l i t y and any c l a i m f o r r e c o v e r y s h o u l d be e s t i m a t e d and e v a l u a t e d i n d e p e n d e n t l y . Furthermore, a c c o u n t i n g guidance g e n e r a l l y p r o s c r i b e s t h e o f f s e t t i n g o f a s s e t s and l i a b i l i t i e s e x c e p t where a r i g h t o f s e t o f f e x i s t s . n2 T h i s g e n e r a l p r o s c r i p t i o n was s t r e n g t h e n e d b y t h e r e c e n t i s s u a n c e o f Financial Accounting Standards Board Interpretation No. 39, " O f f s e t t i n g o f Amounts R e l a t i n g t o C e r t a i n C o n t r a c t s , " {"FIN 3 9 " ) , w h i c h i s e f f e c t i v e f o r f i n a n c i a l s t a t e m e n t s i s s u e d f o r p e r i o d s b e g i n n i n g a f t e r December 15, 1 9 9 3 . The g u i d a n c e i n t h a t i n t e r p r e t a t i o n i n d i c a t e s t h a t t h e p r o h i b i t i o n o n s e t o f f i n t h e b a l a n c e s h e e t s h o u l d be a p p l i e d more c o m p r e h e n s i v e l y t h a n p r e v i o u s l y may h a v e b e e n t h e p r a c t i c e .
n 2 P a r a g r a p h 7 o f A c c o u n t i n g P r i n c i p l e s B o a r d O p i n i o n No. 1 0 , T e c h n i c a l B u l l e t i n 88-2, " D e f i n i t i o n of a Right of S e t o f f . "
"Omnibus
Opinion."
Also,
FASB
I t i s t h e s t a f f ' s view t h a t p r e s e n t a t i o n o f l i a b i l i t i e s n e t o f claims f o r r e c o v e r y w i l l n o t b e a p p r o p r i a t e a f t e r t h e p r o v i s i o n s o f F I N 39 a r e r e q u i r e d t o be a p p l i e d i n f i n a n c i a l s t a t e m e n t s . I n t h e i n t e r i m , r e g i s t r a n t s s h o u l d e n s u r e t h a t n o t e s t o t h e f i n a n c i a l statements i n c l u d e i n f o r m a t i o n necessary t o an u n d e r s t a n d i n g o f t h e m a t e r i a l u n c e r t a i n t i e s a f f e c t i n g b o t h t h e measurement o f t h e l i a b i l i t y a n d t h e r e a l i z a t i o n o f r e c o v e r i e s . The s t a f f b e l i e v e s t h e s e d i s c l o s u r e s s h o u l d i n c l u d e t h e g r o s s amount o f a n y c l a i m s f o r r e c o v e r y t h a t a r e netted against the l i a b i l i t y . Question
2: I f a r e g i s t r a n t
i s j o i n t l y and s e v e r a l l y l i a b l e w i t h r e s p e c t t o a
Page 5 58
FR
32843,
*32844
contaminated s i t e but there i s a reasonable basis f o r apportionment of costs among r e s p o n s i b l e p a r t i e s , m u s t t h e r e g i s t r a n t r e c o g n i z e a l i a b i l i t y w i t h respect t o costs apportioned to other responsible parties? I n t e r p r e t i v e R e s p o n s e : No. However, i f i t i s p r o b a b l e t h a t o t h e r r e s p o n s i b l e p a r t i e s w i l l n o t f u l l y pay c o s t s a p p o r t i o n e d t o them, t h e l i a b i l i t y t h a t i s r e c o g n i z e d by t h e r e g i s t r a n t s h o u l d i n c l u d e t h e r e g i s t r a n t ' s b e s t e s t i m a t e , before c o n s i d e r a t i o n of p o t e n t i a l recoveries from other p a r t i e s , of the a d d i t i o n a l c o s t s t h a t t h e r e g i s t r a n t e x p e c t s t o pay. D i s c u s s i o n o f u n c e r t a i n t i e s a f f e c t i n g t h e r e g i s t r a n t ' s u l t i m a t e o b l i g a t i o n may be n e c e s s a r y i f , f o r e x a m p l e , t h e s o l v e n c y o f one o r more p a r t i e s i s i n d o u b t o r r e s p o n s i b i l i t y f o r t h e s i t e i s d i s p u t e d by a p a r t y . A n o t e t o t h e f i n a n c i a l s t a t e m e n t s s h o u l d d e s c r i b e any a d d i t i o n a l loss t h a t i s reasonably possible. Question 3: E s t i m a t e s a n d a s s u m p t i o n s r e g a r d i n g t h e e x t e n t o f e n v i r o n m e n t a l o r p r o d u c t l i a b i l i t y , methods o f remedy, and amounts o f r e l a t e d c o s t s f r e q u e n t l y p r o v e t o be d i f f e r e n t f r o m t h e u l t i m a t e o u t c o m e . How do t h e s e u n c e r t a i n t i e s a f f e c t t h e r e c o g n i t i o n and m e a s u r e m e n t o f t h e l i a b i l i t y ? I n t e r p r e t i v e Response: The m e a s u r e m e n t o f t h e l i a b i l i t y s h o u l d be b a s e d o n c u r r e n t l y a v a i l a b l e f a c t s , e x i s t i n g t e c h n o l o g y , a n d p r e s e n t l y e n a c t e d l a w s and r e g u l a t i o n s , and s h o u l d t a k e i n t o c o n s i d e r a t i o n t h e l i k e l y e f f e c t s o f i n f l a t i o n a n d o t h e r s o c i e t a l and e c o n o m i c f a c t o r s . N o t w i t h s t a n d i n g s i g n i f i c a n t u n c e r t a i n t i e s , management may n o t d e l a y r e c o g n i t i o n o f a c o n t i n g e n t l i a b i l i t y u n t i l o n l y a s i n g l e amount c a n be r e a s o n a b l y e s t i m a t e d . I f management i s a b l e t o d e t e r m i n e t h a t t h e amount o f t h e l i a b i l i t y i s l i k e l y t o f a l l w i t h i n a r a n g e a n d no amount w i t h i n t h a t r a n g e c a n be d e t e r m i n e d t o be t h e b e t t e r e s t i m a t e , t h e r e g i s t r a n t s h o u l d r e c o g n i z e t h e m i n i m u m amount o f t h e r a n g e p u r s u a n t t o Financial Accounting Standards Board Interpretation No. 14, " R e a s o n a b l e E s t i m a t i o n o f t h e Amount o f a L o s s " ("FIN 1 4 " ) . The s t a f f b e l i e v e s t h a t r e c o g n i t i o n o f a l o s s equal t o t h e lower l i m i t o f t h e range i s n e c e s s a r y even i f the upper l i m i t of the range i s u n c e r t a i n . In measuring i t s environmental l i a b i l i t y , a r e g i s t r a n t should consider a v a i l a b l e evidence i n c l u d i n g the r e g i s t r a n t ' s p r i o r experience i n remediation of c o n t a m i n a t e d s i t e s , o t h e r companies' c l e a n - u p e x p e r i e n c e , and d a t a r e l e a s e d by t h e E n v i r o n m e n t a l P r o t e c t i o n Agency o r o t h e r o r g a n i z a t i o n s . I n f o r m a t i o n n e c e s s a r y t o s u p p o r t a r e a s o n a b l e e s t i m a t e o r r a n g e o f l o s s may be a v a i l a b l e p r i o r t o t h e p e r f o r m a n c e o f any d e t a i l e d r e m e d i a t i o n s t u d y . Even i n s i t u a t i o n s i n w h i c h t h e r e g i s t r a n t has n o t d e t e r m i n e d t h e s p e c i f i c s t r a t e g y f o r remediation, estimates of the costs associated w i t h the various a l t e r n a t i v e r e m e d i a t i o n s t r a t e g i e s c o n s i d e r e d f o r a s i t e may be a v a i l a b l e o r r e a s o n a b l y e s t i m a b l e . W h i l e t h e r a n g e o f c o s t s a s s o c i a t e d w i t h t h e a l t e r n a t i v e s may be b r o a d , t h e minimum c l e a n - u p c o s t i s u n l i k e l y t o be z e r o . As a d d i t i o n a l i n f o r m a t i o n becomes a v a i l a b l e , c h a n g e s i n e s t i m a t e s o f t h e l i a b i l i t y s h o u l d be r e p o r t e d i n t h e p e r i o d t h a t those changes o c c u r i n accordance w i t h p a r a g r a p h s 31-33 o f Accounting Principles Board Opinion No. 20, " A c c o u n t i n g Changes." Question 4: A s s u m i n g t h e r e g i s t r a n t ' s e s t i m a t e o f an e n v i r o n m e n t a l o r p r o d u c t l i a b i l i t y m e e t s t h e c o n d i t i o n s s e t f o r t h i n t h e c o n s e n s u s on E I T F I s s u e 93-5 f o r r e c o g n i t i o n on a d i s c o u n t b a s i s , w h a t d i s c o u n t r a t e s h o u l d be a p p l i e d ? I n t e r p r e t i v e Response: The s t a f f b e l i e v e s t h a t t h e r a t e u s e d t o d i s c o u n t t h e c a s h p a y m e n t s s h o u l d be t h e r a t e t h a t w i l l p r o d u c e an amount a t w h i c h t h e e n v i r o n m e n t a l o r p r o d u c t l i a b i l i t y c o u l d be s e t t l e d i n an a r m ' s - l e n g t h [*32845]
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transaction w i t h a t h i r d party. I f that rate i s not r e a d i l y determinable, the d i s c o u n t r a t e used t o d i s c o u n t t h e cash payments s h o u l d n o t exceed t h e i n t e r e s t r a t e o n m o n e t a r y a s s e t s t h a t a r e e s s e n t i a l l y r i s k f r e e n3 a n d h a v e m a t u r i t i e s comparable t o t h a t o f t h e environmental o r product l i a b i l i t y .
n3 A s d e s c r i b e d "Extinguishment
i n paragraph of Debt."
4(a) of
Statement
o f Financial
Accounting
Standards
No.
76,
I f t h e l i a b i l i t y i s r e c o g n i z e d on a d i s c o u n t e d b a s i s t o r e f l e c t t h e t i m e v a l u e o f money, t h e n o t e s t o t h e f i n a n c i a l s t a t e m e n t s s h o u l d , a t a minimum, i n c l u d e d i s c l o s u r e s o f t h e d i s c o u n t r a t e used, t h e expected aggregate u n d i s c o u n t e d amoimt, e x p e c t e d payments f o r each o f t h e f i v e s u c c e e d i n g y e a r s and t h e a g g r e g a t e amount t h e r e a f t e r , a n d a r e c o n c i l i a t i o n o f t h e e x p e c t e d a g g r e g a t e u n d i s c o u n t e d amount t o a m o u n t s r e c o g n i z e d i n t h e s t a t e m e n t s o f f i n a n c i a l p o s i t i o n . M a t e r i a l c h a n g e s i n t h e e x p e c t e d a g g r e g a t e amount s i n c e t h e p r i o r b a l a n c e s h e e t d a t e , o t h e r t h a n t h o s e r e s u l t i n g f r o m pay-down o f t h e o b l i g a t i o n , s h o u l d be e x p l a i n e d . Question 5: What f i n a n c i a l s t a t e m e n t d i s c l o s u r e s s h o u l d be f u r n i s h e d w i t h r e s p e c t t o r e c o r d e d and Lmrecorded p r o d u c t o r e n v i r o n m e n t a l liabilities? I n t e r p r e t i v e Response: P a r a g r a p h s 9 a n d 10 o f SFAS 5 i d e n t i f y d i s c l o s u r e s regarding loss contingencies t h a t g e n e r a l l y are f u r n i s h e d i n notes t o f i n a n c i a l s t a t e m e n t s . The s t a f f b e l i e v e s t h a t p r o d u c t a n d e n v i r o n m e n t a l l i a b i l i t i e s t y p i c a l l y a r e o f such s i g n i f i c a n c e t h a t d e t a i l e d d i s c l o s u r e s r e g a r d i n g t h e j u d g m e n t s and a s s u m p t i o n s u n d e r l y i n g t h e r e c o g n i t i o n and measurement o f t h e l i a b i l i t i e s are necessary t o prevent t h e f i n a n c i a l statements from being m i s l e a d i n g and t o i n f o r m readers f u l l y r e g a r d i n g t h e range o f reasonably p o s s i b l e outcomes t h a t c o u l d have a m a t e r i a l e f f e c t on t h e r e g i s t r a n t ' s financial condition, results of operations, or l i q u i d i t y . Examples o f d i s c l o s u r e s t h a t may b e n e c e s s a r y i n c l u d e : Circumstances
affecting the r e l i a b i l i t y
and p r e c i s i o n o f l o s s e s t i m a t e s .
The e x t e n t t o w h i c h u n a s s e r t e d c l a i m s a r e r e f l e c t e d i n a n y a c c r u a l o r may a f f e c t t h e magnitude o f t h e contingency. U n c e r t a i n t i e s w i t h r e s p e c t t o j o i n t a n d s e v e r a l l i a b i l i t y t h a t may a f f e c t t h e magnitude o f t h e contingency, i n c l u d i n g d i s c l o s u r e o f t h e aggregate expected cost t o remediate p a r t i c u l a r s i t e s that are i n d i v i d u a l l y m a t e r i a l i ft h e l i k e l i h o o d o f c o n t r i b u t i o n b y t h e o t h e r s i g n i f i c a n t p a r t i e s has n o t been established. D i s c l o s u r e o f t h e n a t u r e and terms potentially responsible parties.
o f c o s t - s h a r i n g arrangements w i t h
other
The e x t e n t t o w h i c h d i s c l o s e d b u t u n r e c o g n i z e d c o n t i n g e n t l o s s e s a r e e x p e c t e d t o be r e c o v e r a b l e t h r o u g h i n s u r a n c e , i n d e m n i f i c a t i o n a r r a n g e m e n t s , o r o t h e r sources, w i t h d i s c l o s u r e o f any m a t e r i a l l i m i t a t i o n s o f t h a t recovery.
of
U n c e r t a i n t i e s regarding t h e l e g a l s u f f i c i e n c y o f insurance claims o r solvency i n s u r a n c e c a r r i e r s . n4
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n4 T h e s t a f f b e l i e v e s t h e r e i s a r e b u t t a b l e p r e s u m p t i o n t h a t no a s s e t s h o u l d be r e c o g n i z e d f o r a claim for recovery from a p a r t y t h a t i s a s s e r t i n g t h a t i t i s not l i a b l e to i n d e m n i f y the r e g i s t r a n t . R e g i s t r a n t s t h a t overcome t h a t p r e s u m p t i o n s h o u l d d i s c l o s e t h e amount of r e c o r d e d r e c o v e r i e s that are being contested and d i s c u s s the r e a s o n s f o r c o n c l u d i n g t h a t the amounts a r e p r o b a b l e of recovery.
The t i m e f r a m e o v e r w h i c h be p a i d o u t .
the accrued
or p r e s e n t l y unrecognized
M a t e r i a l components o f t h e a c c r u a l s and estimates.
significant
amounts
may
assumptions u n d e r l y i n g
R e g i s t r a n t s are cautioned t h a t a statement t h a t the contingency i s not e x p e c t e d t o be m a t e r i a l does n o t s a t i s f y t h e r e q u i r e m e n t s o f SFAS 5 i f t h e r e i s a t l e a s t a r e a s o n a b l e p o s s i b i l i t y t h a t a l o s s e x c e e d i n g amounts a l r e a d y r e c o g n i z e d may h a v e b e e n i n c u r r e d a n d t h e amount o f t h a t a d d i t i o n a l l o s s w o u l d be m a t e r i a l t o a d e c i s i o n t o b u y o r s e l l t h e r e g i s t r a n t ' s s e c u r i t i e s . I n t h a t c a s e , t h e r e g i s t r a n t m u s t e i t h e r (a) d i s c l o s e t h e e s t i m a t e d a d d i t i o n a l l o s s , o r r a n g e o f l o s s , t h a t i s r e a s o n a b l y p o s s i b l e , o r {b) s t a t e t h a t s u c h e s t i m a t e c a n n o t be made. Question 6: What d i s c l o s u r e s r e g a r d i n g l o s s c o n t i n g e n c i e s may outside the f i n a n c i a l statements?
be
necessary
I n t e r p r e t i v e Response: R e g i s t r a n t s s h o u l d c o n s i d e r t h e r e q u i r e m e n t s o f I t e m s 1 0 1 ( D e s c r i p t i o n o f B u s i n e s s ) , 103 ( L e g a l P r o c e e d i n g s ) , and 303 (Management's D i s c u s s i o n a n d A n a l y s i s ) o f R e g u l a t i o n s S-K a n d S-B. The C o m m i s s i o n has i s s u e d two i n t e r p r e t i v e r e l e a s e s t h a t p r o v i d e a d d i t i o n a l guidance w i t h r e s p e c t t o these i t e m s . n5 I n a 1989 i n t e r p r e t i v e r e l e a s e , t h e C o m m i s s i o n n o t e d t h a t t h e a v a i l a b i l i t y o f i n s u r a n c e , i n d e m n i f i c a t i o n , o r c o n t r i b u t i o n may be r e l e v a n t i n d e t e r m i n i n g w h e t h e r t h e c r i t e r i a f o r d i s c l o s u r e h a v e b e e n met w i t h r e s p e c t t o a c o n t i n g e n c y . n6 The r e g i s t r a n t ' s a s s e s s m e n t i n t h i s r e g a r d s h o u l d i n c l u d e c o n s i d e r a t i o n o f f a c t s s u c h as t h e p e r i o d s i n w h i c h c l a i m s f o r r e c o v e r y may be r e a l i z e d , t h e l i k e l i h o o d t h a t t h e c l a i m s may be c o n t e s t e d , and t h e f i n a n c i a l c o n d i t i o n of t h i r d p a r t i e s from which recovery i s expected.
n5 S e e S e c u r i t i e s A c t (May 18, 1989).
n6See, of the
f o r example, Codification
Release
No.
6130
{September
27,
f o o t n o t e 30 o f F i n a n c i a l R e p o r t i n g of F i n a n c i a l R e p o r t i n g Policies].
1979)
and
Release
Financial
No.
36
Reporting
[footnote
17
Release
of
No.
Section
36
501.02
D i s c l o s u r e s made p u r s u a n t t o t h e g u i d a n c e i d e n t i f i e d i n t h e p r e c e d i n g p a r a g r a p h s h o u l d be s u f f i c i e n t l y s p e c i f i c t o e n a b l e a r e a d e r t o u n d e r s t a n d t h e scope o f t h e c o n t i n g e n c i e s a f f e c t i n g t h e r e g i s t r a n t . For example, a r e g i s t r a n t ' s d i s c u s s i o n o f h i s t o r i c a l and a n t i c i p a t e d e n v i r o n m e n t a l e x p e n d i t u r e s s h o u l d , t o t h e e x t e n t m a t e r i a l , d e s c r i b e s e p a r a t e l y (a) r e c u r r i n g c o s t s a s s o c i a t e d w i t h m a n a g i n g h a z a r d o u s s u b s t a n c e s and p o l l u t i o n i n o n - g o i n g o p e r a t i o n s , (b) c a p i t a l e x p e n d i t u r e s t o l i m i t o r m o n i t o r h a z a r d o u s s u b s t a n c e s o r p o l l u t a n t s , (c) m a n d a t e d e x p e n d i t u r e s t o r e m e d i a t e p r e v i o u s l y c o n t a m i n a t e d s i t e s , a n d (d) o t h e r
Page 8 58
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3 2 8 4 3 , *32845
i n f r e q u e n t o r n o n - r e c u r r i n g c l e a n - u p e x p e n d i t u r e s t h a t c a n be a n t i c i p a t e d b u t which are not r e q u i r e d i n the present circumstances. Disaggregated d i s c l o s u r e t h a t d e s c r i b e s a c c r u e d and r e a s o n a b l y l i k e l y l o s s e s w i t h r e s p e c t t o p a r t i c u l a r e n v i r o n m e n t a l s i t e s t h a t a r e i n d i v i d u a l l y m a t e r i a l may be n e c e s s a r y f o r a f u l l u n d e r s t a n d i n g o f t h e s e c o n t i n g e n c i e s . A l s o , i f management's i n v e s t i g a t i o n o f p o t e n t i a l l i a b i l i t y and r e m e d i a t i o n c o s t i s a t d i f f e r e n t stages w i t h r e s p e c t t o i n d i v i d u a l s i t e s , t h e c o n s e q u e n c e s o f t h i s w i t h r e s p e c t t o a m o u n t s a c c r u e d and d i s c l o s e d s h o u l d be d i s c u s s e d . Examples o f s p e c i f i c d i s c l o s u r e s t y p i c a l l y r e l e v a n t t o an u n d e r s t a n d i n g o f h i s t o r i c a l and a n t i c i p a t e d p r o d u c t l i a b i l i t y c o s t s i n c l u d e t h e n a t u r e o f p e r s o n a l i n j u r y o r p r o p e r t y damages a l l e g e d b y c l a i m a n t s , a g g r e g a t e s e t t l e m e n t c o s t s by t y p e o f c l a i m , and r e l a t e d c o s t s o f a d m i n i s t e r i n g and l i t i g a t i n g c l a i m s . D i s a g g r e g a t e d d i s c l o s u r e t h a t d e s c r i b e s a c c r u e d and r e a s o n a b l y l i k e l y l o s s e s w i t h r e s p e c t t o p a r t i c u l a r c l a i m s may be n e c e s s a r y i f t h e y a r e i n d i v i d u a l l y m a t e r i a l . I f t h e c o n t i n g e n c y i n v o l v e s a l a r g e number o f r e l a t i v e l y s m a l l i n d i v i d u a l c l a i m s o f a s i m i l a r t y p e , s u c h as p e r s o n a l i n j u r y f r o m e x p o s u r e t o a s b e s t o s d i s c l o s u r e o f t h e number o f c l a i m s p e n d i n g a t e a c h b a l a n c e s h e e t d a t e , t h e number o f c l a i m s f i l e d f o r e a c h p e r i o d p r e s e n t e d , t h e number o f c l a i m s d i s m i s s e d , s e t t l e d , o r o t h e r w i s e r e s o l v e d f o r each p e r i o d , and t h e average s e t t l e m e n t amount p e r c l a i m may be n e c e s s a r y . D i s c l o s u r e s s h o u l d a d d r e s s h i s t o r i c a l and e x p e c t e d t r e n d s i n t h e s e amounts and t h e i r r e a s o n a b l y l i k e l y e f f e c t s on o p e r a t i n g r e s u l t s and l i q u i d i t y . Q u e s t i o n 7: What d i s c l o s u r e s h o u l d be f u r n i s h e d w i t h r e s p e c t t o [*32846] r e s t o r a t i o n costs or other environmental e x i t costs?
site
I n t e r p r e t i v e Response: The s t a f f b e l i e v e s t h a t m a t e r i a l l i a b i l i t i e s f o r s i t e r e s t o r a t i o n , p o s t - c l o s u r e , and m o n i t o r i n g commitments, o r o t h e r e x i t c o s t s t h a t may o c c u r o n t h e s a l e , d i s p o s a l , o r abandonment o f a p r o p e r t y s h o u l d be d i s c l o s e d i n the notes t o the f i n a n c i a l statements. Appropriate disclosures g e n e r a l l y would i n c l u d e the nature of the costs i n v o l v e d , the t o t a l a n t i c i p a t e d cost, the t o t a l c o s t s accrued t o date, the balance sheet c l a s s i f i c a t i o n of a c c r u e d a m o u n t s , a n d t h e r a n g e o r amount o f r e a s o n a b l y p o s s i b l e a d d i t i o n a l l o s s e s . I f a n a s s e t h e l d f o r s a l e o r d e v e l o p m e n t w i l l r e q u i r e r e m e d i a t i o n t o be p e r f o r m e d b y t h e r e g i s t r a n t p r i o r t o d e v e l o p m e n t , s a l e , o r as a c o n d i t i o n o f s a l e , a n o t e t o t h e f i n a n c i a l s t a t e m e n t s s h o u l d d e s c r i b e how t h e n e c e s s a r y e x p e n d i t u r e s are c o n s i d e r e d i n t h e assessment o f t h e a s s e t ' s n e t r e a l i z a b l e v a l u e . A d d i t i o n a l l y , i f t h e r e g i s t r a n t may be l i a b l e f o r r e m e d i a t i o n o f e n v i r o n m e n t a l damage r e l a t i n g t o a s s e t s o r b u s i n e s s e s p r e v i o u s l y d i s p o s e d , d i s c l o s u r e s h o u l d be made i n t h e f i n a n c i a l s t a t e m e n t s u n l e s s t h e l i k e l i h o o d o f a m a t e r i a l u n f a v o r a b l e o u t c o m e o f t h a t c o n t i n g e n c y i s r e m o t e . The r e g i s t r a n t ' s a c c o u n t i n g p o l i c y w i t h r e s p e c t t o s u c h c o s t s s h o u l d be d i s c l o s e d i n a c c o r d a n c e w i t h Accounting Principle Board Opinion No. 22, " D i s c l o s u r e o f A c c o u n t i n g Policies." Question 8: A r e g i s t r a n t e x p e c t s t o i n c u r s i t e r e s t o r a t i o n c o s t s , p o s t - c l o s u r e and m o n i t o r i n g c o s t s , o r o t h e r e n v i r o n m e n t a l e x i t c o s t s a t t h e of t h e u s e f u l l i f e o f t h e a s s e t . Would t h e s t a f f o b j e c t t o t h e r e g i s t r a n t ' s proposal t o accrue the e x i t costs over the u s e f u l l i f e o f the asset?
end
Interpretive Response: No. T h i s i s a n e s t a b l i s h e d a c c o u n t i n g p r a c t i c e i n some i n d u s t r i e s . I n o t h e r i n d u s t r i e s , t h e s t a f f w i l l r a i s e no o b j e c t i o n t o t h a t a c c o u n t i n g p r o v i d e d t h a t t h e c r i t e r i a i n p a r a g r a p h 8 o f SFAS 5 a r e met. The s t a f f a c k n o w l e d g e s t h a t i n some c i r c u m s t a n c e s t h e u s e o f t h e a s s e t i n o p e r a t i o n s
Page 9 58
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g i v e s r i s e t o g r o w i n g e x i t c o s t s t h a t r e p r e s e n t a p r o b a b l e l i a b i l i t y . The a c c r u a l o f t h e l i a b i l i t y s h o u l d b e r e c o g n i z e d as a n e x p e n s e i n a c c o r d a n c e w i t h the consensus o n EITF I s s u e 90-8, " C a p i t a l i z a t i o n o f C o s t s t o T r e a t E n v i r o n m e n t a l C o n t a m i n a t i o n . " See i n t e r p r e t i v e r e s p o n s e s t o q u e s t i o n s 7 a n d 8 f o r guidance on a p p r o p r i a t e d i s c l o s u r e s . T o p i c 2: B u s i n e s s A. Purchase
Combinations
Method
* * * * * 7. L o s s c o n t i n g e n c i e s assumed i n a b u s i n e s s
combination.
Facts: A r e g i s t r a n t a c q u i r e s a b u s i n e s s e n t e r p r i s e i n a t r a n s a c t i o n a c c o u n t e d f o r by t h e p u r c h a s e method. I n c o n n e c t i o n w i t h t h e a c q u i s i t i o n , t h e a c q u i r i n g company assumes c e r t a i n c o n t i n g e n t l i a b i l i t i e s o f t h e a c q u i r e d company. Q u e s t i o n ; How s h o u l d t h e a c q u i r i n g company a c c o u n t f o r a n d d i s c l o s e c o n t i n g e n t l i a b i l i t i e s t h a t h a v e b e e n assumed i n a b u s i n e s s combination? I n t e r p r e t i v e Response: I n a c c o r d a n c e w i t h Accounting Principles Board Opinion No. 16, " B u s i n e s s C o m b i n a t i o n s , " t h e a c q u i r i n g company s h o u l d a l l o c a t e t h e c o s t o f a n a c q u i r e d company t o t h e a s s e t s a c q u i r e d a n d l i a b i l i t i e s assumed b a s e d o n t h e i r f a i r values a t t h e date o f a c q u i s i t i o n . With respect t o contingencies f o r which a f a i r value i s n o t determinable a t t h e date o f a c q u i s i t i o n , t h e guidance o f S t a t e m e n t o f Financial Accounting Standards No. 5, " A c c o u n t i n g f o r C o n t i n g e n c i e s " a n d Financial Accounting Standards Board Interpretation No. 14, " R e a s o n a b l e E s t i m a t i o n o f t h e Amount o f a L o s s " s h o u l d be a p p l i e d . I f t h e r e g i s t r a n t i s a w a i t i n g a d d i t i o n a l i n f o r m a t i o n t h a t i t has a r r a n g e d t o o b t a i n f o r the measurement o f a c o n t i n g e n c y d u r i n g t h e a l l o c a t i o n p e r i o d s p e c i f i e d by S t a t e m e n t o f Financial Accounting Standards No. 38, " A c c o u n t i n g f o r P r e a c q u i s i t i o n Contingencies o f Purchased E n t e r p r i s e s , " t h e s t a f f b e l i e v e s t h a t the r e g i s t r a n t s h o u l d d i s c l o s e t h a t t h e purchase p r i c e a l l o c a t i o n i s p r e l i m i n a r y . I n t h a t circumstance, t h e r e g i s t r a n t should describe the nature o f the c o n t i n g e n c y and f u r n i s h o t h e r a v a i l a b l e i n f o r m a t i o n t h a t w i l l enable a reader t o understand i t s p o t e n t i a l e f f e c t s on t h e f i n a l a l l o c a t i o n and on p o s t - a c q u i s i t i o n o p e r a t i n g r e s u l t s . Management's D i s c u s s i o n a n d A n a l y s i s s h o u l d i n c l u d e a p p r o p r i a t e d i s c l o s u r e r e g a r d i n g any unrecognized p r e a c q u i s i t i o n c o n t i n g e n c y and i t s r e a s o n a b l y l i k e l y e f f e c t s on o p e r a t i n g r e s u l t s , l i q u i d i t y , and f i n a n c i a l c o n d i t i o n . The s t a f f b e l i e v e s t h a t t h e a l l o c a t i o n p e r i o d s h o u l d n o t e x t e n d b e y o n d t h e minimum r e a s o n a b l e p e r i o d n e c e s s a r y t o g a t h e r t h e i n f o r m a t i o n t h a t t h e r e g i s t r a n t has a r r a n g e d t o o b t a i n f o r p u r p o s e s o f t h e e s t i m a t e . S i n c e an a l l o c a t i o n p e r i o d u s u a l l y s h o u l d n o t e x c e e d one y e a r , r e g i s t r a n t s b e l i e v i n g t h a t they w i l l r e q u i r e a longer p e r i o d a r e encouraged t o discuss t h e i r circumstances w i t h t h e s t a f f . I f i t i s u n l i k e l y t h a t t h e l i a b i l i t y c a n be e s t i m a t e d o n t h e b a s i s o f i n f o r m a t i o n known t o b e o b t a i n a b l e a t t h e t i m e o f t h e i n i t i a l p u r c h a s e p r i c e a l l o c a t i o n , t h e a l l o c a t i o n p e r i o d s h o u l d n o t be e x t e n d e d w i t h r e s p e c t t o t h a t l i a b i l i t y . An a d j u s t m e n t t o t h e c o n t i n g e n t l i a b i l i t y a f t e r t h e e x p i r a t i o n o f t h e a l l o c a t i o n p e r i o d w o u l d be r e c o g n i z e d a s a n e l e m e n t o f n e t i n c o m e . T o p i c 10: U t i l i t y Companies
Page 10 58
F.
Presentation o f L i a b i l i t i e s
FR 32843,
*32846
f o r Environmental
Costs
Facts: A p u b l i c u t i l i t y company d e t e r m i n e s t h a t i t i s o b l i g a t e d t o p a y m a t e r i a l a m o u n t s a s a r e s u l t o f a n e n v i r o n m e n t a l l i a b i l i t y . These amoionts may r e l a t e t o , f o r e x a m p l e , damages a t t r i b u t e d t o c l e a n - u p o f h a z a r d o u s w a s t e s , r e c l a m a t i o n costs, f i n e s , and l i t i g a t i o n costs. Q u e s t i o n 1: May a r a t e - r e g u l a t e d e n t e r p r i s e p r e s e n t o n i t s b a l a n c e s h e e t t h e amount o f i t s e s t i m a t e d l i a b i l i t y f o r e n v i r o n m e n t a l c o s t s n e t o f p r o b a b l e f u t u r e revenue r e s u l t i n g from t h e i n c l u s i o n o f such c o s t s i n a l l o w a b l e c o s t s f o r rate-making purposes? I n t e r p r e t i v e Response: No. S t a t e m e n t of Financial Accounting Standards No. 71, " A c c o u n t i n g f o r t h e E f f e c t s o f C e r t a i n T y p e s o f R e g u l a t i o n , " ("SFAS 7 1 " ) s p e c i f i e s t h e c o n d i t i o n s under which r a t e a c t i o n s o f a r e g u l a t o r can p r o v i d e r e a s o n a b l e a s s u r a n c e o f t h e e x i s t e n c e o f a n a s s e t . The s t a f f b e l i e v e s t h a t e n v i r o n m e n t a l c o s t s m e e t i n g t h e c r i t e r i a o f p a r a g r a p h 9 n7 o f SFAS 7 1 s h o u l d b e p r e s e n t e d o n t h e b a l a n c e s h e e t as an a s s e t a n d s h o u l d n o t be o f f s e t a g a i n s t t h e l i a b i l i t y . C o n t i n g e n t r e c o v e r i e s t h r o u g h r a t e s t h a t do n o t meet t h e c r i t e r i a o f p a r a g r a p h 9 s h o u l d n o t be r e c o g n i z e d e i t h e r as an a s s e t o r as a r e d u c t i o n o f t h e probable l i a b i l i t y .
n7 P a r a g r a p h 9 o f S F A S 7 1 r e q u i r e s a r a t e - r e g u l a t e d e n t e r p r i s e t o c a p i t a l i z e a l l o r p a r t o f a n i n c u r r e d c o s t t h a t would o t h e r w i s e be charged t o expense i f i t i s p r o b a b l e t h a t f u t u r e revenue will be p r o v i d e d t o r e c o v e r t h e p r e v i o u s l y i n c u r r e d cost from i n c l u s i o n o f t h e c o s t s i n allowable costs for rate-making purposes.
Question 2: May a r a t e - r e g u l a t e d e n t e r p r i s e d e l a y r e c o g n i t i o n o f a p r o b a b l e and e s t i m a b l e l i a b i l i t y f o r e n v i r o n m e n t a l c o s t s w h i c h i t h a s i n c u r r e d a t t h e d a t e o f t h e l a t e s t b a l a n c e s h e e t u n t i l t h e r e g u l a t o r ' s d e l i b e r a t i o n s have p r o c e e d e d t o a p o i n t e n a b l i n g management t o d e t e r m i n e w h e t h e r t h i s c o s t i s l i k e l y t o be i n c l u d e d i n a l l o w a b l e c o s t s f o r r a t e - m a k i n g purposes? Interpretive Response: No. S t a t e m e n t of Financial Accounting Standards No. 5, "Accounting f o r c o n t i n g e n c i e s , " s t a t e s t h a t an e s t i m a t e d l o s s from a l o s s c o n t i n g e n c y s h a l l be a c c r u e d b y a c h a r g e t o i n c o m e i f i t i s p r o b a b l e t h a t a l i a b i l i t y h a s b e e n i n c u r r e d a n d t h e amount o f t h e l o s s c a n be r e a s o n a b l y e s t i m a t e d . The s t a f f b e l i e v e s t h a t a c t i o n s [*32847] o f a r e g u l a t o r can a f f e c t w h e t h e r a n i n c u r r e d c o s t i s c a p i t a l i z e d o r e x p e n s e d p u r s u a n t t o SFAS 7 1 , b u t t h e r e g u l a t o r ' s a c t i o n s cannot a f f e c t t h e t i m i n g o f t h e r e c o g n i t i o n o f t h e liability. [FR Doc. 93-13893 F i l e d 6-11-93; 8:45 am] B I L L I N G CODE 8010-01-M