Accounting for Loss
Contingencies
Alison T. Spivey
Associate Chief Accountant
Office of the Chief Accountant
Disclaimer
The Securities and Exchange
Commission, as a matter of policy,
disclaims responsibility for any
private publication or statement by
any of its employees. Therefore, the
views expressed today are my own,
and do not necessarily reflect the
views of the Commission or the other
members of the staff of the
Commission.
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Presentation overview
•Use of estimates in financial statements
•Accounting for loss contingencies
•SEC views
•Assumptions used in accounting
estimates
•The role of disclosures
•Recent activities in OCA
•Consulting with OCA staff
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Use of Estimates
•Financial statements include estimates of
underlying values of assets, liabilities, and
equity
 Financial instruments
 Contingencies
 Compensation programs (e.g., stock options)
•Current accounting standards provide
guidance on preparing estimates.
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Loss Contingencies - Current
Accounting Model
•Statement 5 issued in 1975.
•Requires accrual of estimated loss from
loss contingency
 Probable
 Reasonably estimable
•Disclosure of estimated possible loss or
range of loss required when accruals not
recorded.
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Recent Accounting Standards and
Other Guidance
•Statement 143 – Asset Retirement
Obligations
•Statement 146 – Exit or Disposal Activities
•FIN 45 – Guarantees
•Concept Statement 7 – Cash Flow
Information and Present Value
Measurements
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Proposal Stage Literature
•FASB:
 Fair Value Measurements
 Business Combinations
 Conceptual Framework
•IASB:
 Business Combinations
 Provisions and Contingent Liabilities
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Loss Contingencies - Commissioner
and Staff Views
•1998 – Chairman Arthur Levitt, The
“Numbers” Game
•Staff Accounting Bulletins
•Recent staff speeches
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Assumptions
•Assumptions underlying accounting
estimates – guidance in specific
accounting standards
 Pension accounting
 Share-based payment (stock options)
•Staff Accounting Bulletin 107
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Disclosures
•Financial statements
•MD&A
•Critical Accounting Estimates
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Study and Report on Off-Balance
Sheet Arrangements
Overview
 Mandated by Section 401(c) of Sarbanes-Oxley
 Extent of off-balance sheet transactions,
including the extent to which SPEs are used to
facilitate such transactions
 Assessment of GAAP and Commission rules in
providing transparency of such transactions to
investors
 Assessment of GAAP consolidation of SPEs by
sponsors who have majority of risks and
rewards
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Study and Report on Off-Balance
Sheet Arrangements
Topics Addressed
 Leases
 Retirement arrangements
 Consolidation issues
 Contingencies
 Transfers of financial assets with continuing
involvement
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Study and Report on Off-Balance
Sheet Arrangements
Improvements to Financial Reporting
 Discourage transactions and transaction
structures motivated by accounting and
reporting considerations
 Expand use of objectives-oriented standards
 Improve consistency and relevance of
disclosures
 Focus financial reporting on communication
with investors, rather than just rule compliance
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Share-Based Payment
Market Instruments
 A market instrument is an instrument that is designed
to be sold into the market at a value intended to be
reasonably equivalent to the fair value of employee
share options.

A statement providing the former Chief Accountant’s
views on market instruments available at
http://www.sec.gov/news/speech/spch090905dtn.htm

Chairman Cox’s statement available at
http://www.sec.gov/news/press/2005-129.htm
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Insurance Risk Transfer
 Not only an issue for insurance companies
 To
ensure appropriate accounting for
insurance contracts under FAS 5,
noninsurance companies need to assess
whether the contract indemnifies the
company against loss
 AICPA Technical Practice Aid, Accounting by
Noninsurance Enterprises for Property and
Casualty Insurance Arrangements That Limit
Risk
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Valuation Issues
MEASUREMENT:
 Valuations must be in accordance with
appropriate U.S. GAAP standards and related
guidance
 Reliability of measurement
 Not looking for precise measurements
 Reasonable range of estimate based upon
available information
 Use of “Concepts 7” approach
 Very rare to use risk free discount rate
 Materiality assessment cannot be made unless
try to do some analysis calculation
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Valuation Issues
 SFAS 141 – immaterial items may collectively materially
misstate goodwill
 SFAS 123 – very rare that option is so complex that
unable to value using option pricing models
USE OF EXPERTS:
 Valuator’s role: independent/unbiased valuations
 Whether prepared by management or use of outside
experts
 “Indication of value” level of assurance is not sufficient
if primary valuation evidence
 Management is responsible for valuation assumptions
in SEC filings
 Any reference to valuator raises valuator
expertization issues in SEC filings
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Consultations with OCA
Guidance for Consulting with OCA
 Most companies just “want to get the accounting right.”
We want to help.
 Guidance for resolving ‘pre-filing’ questions is posted on
the SEC’s website

http://www.sec.gov/info/accountants/ocasubguidance.htm
 Companies should provide OCA with a written submission
(commonly referred to as a “pre-clearance” submission)
 Auditor participation is required
 Registrants can request their SEC reviewer to consult on
specific matters during a Corp. Fin review process
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Consultations with OCA
Consulting with OCA
 Recommended form and content of
correspondence to expedite the process
 What to expect from OCA
 Team
leader will contact the company within
3 days of receipt of submission; entire
process usually takes 2 – 4 weeks but
depends on nature of the issue
 Team,
Senior Associate and Deputy Chief
Accountants may be involved
 Company
may request Chief Accountant
review of conclusion reached by OCA staff
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