In: Accounting
"Accounting for a Loss Contingency"
In 1993, the SEC published Staff Accounting Bulletin No. 92, Topic 5-Y, Accounting and Disclosures Relating to Loss Contingencies (“SAB 92”). SAB 92 is an interpretation of generally accepted accounting principles (“GAAP”) with regard to contingent environmental liabilities, and “was intended to promote the timely recognition of contingent losses and to address the diversity in practice with respect to the accounting for and disclosure of contingent liabilities.” Under SAB 92, contingent environmental losses must be accrued by a charge to income if it is probable that a liability has been incurred and if the amount of the liability can be estimated. The Emerging Issues Task Force of FASB determined that environmental liabilities should be evaluated independently of potential claims for recovery. Potential losses from environmental claims should only be reduced by potential recoveries that are probable.
SAB 92 is organized in a series of questions and interpretative responses, summarized as follows:
(1) Offsetting losses and recoveries should be represented on the balance sheet separately rather than netted because this “most fairly represents the potential consequences of the contingent claim on the company’s resources.” SAB 92 at 4.
(2) With respect to joint and several liabilities for a contaminated site, if there is a reasonable method of apportioning the costs, and it is probable that the other PRPs will contribute, then the registrant need only recognize the estimate of its portion of the liability. A note on the uncertainties relating to contributions by other PRPs may be necessary.
(3) Liabilities should be estimated based on present facts and existing technology, while also considering all other available information, including future circumstances such as the effects of inflation. If management is able to determine that the amount of a liability is likely to fall within a range, and no amount within that range can be determined to be the better estimate, the registrant should recognize the minimum amount of the range.
(4) If registrants discount estimates of liabilities, the rate used to discount the expected payments should be the rate that will produce an amount at which the environmental liability could be settled in an arm’s length transaction; if that rate cannot be determined, a rate no greater than the risk-free rate should be used.
(5) Detailed disclosures regarding material environmental loss contingencies must be furnished in the notes to financial statements to prevent those financial statements from being misleading.
(6) With respect to disclosures regarding loss contingencies outside of financial statements, Items 101, 103, and 303 of Regulation S-K provide guidance.
(7) Site restoration costs or other environmental exit costs should be disclosed in the notes to financial statements.
(8) During the life of an asset, it is permissible to accrue costs that will be incurred after the useful life of the asset provided the costs are reasonably estimable.