Despite several months of warnings and increased scrutiny over loss contingency disclosures, staff members at the Securities and Exchange Commission say they are still seeing plenty of room for improvement.

During a recent webcast hosted by the Center for Audit Quality, Craig Olinger, deputy chief accountant at the SEC, said the staff is studying loss contingency disclosures to improve compliance with Accounting Standards Codification Topic 450, which has been in effect for some three decades. The staff has increased its focus on the adequacy of disclosures as the Financial Accounting Standards Board has developed proposals for new rules, but placed them on hold pending the SEC's ability to flesh out better disclosures under existing rules. “We want to emphasize all we're doing here is seeking better compliance with the existing standard,” Olinger said. “We are not requesting early adoption of FASB's exposure draft.”

Nili Shah, another deputy chief accountant at the SEC, said the increased scrutiny has so far focused on large financial institutions, where the review and comment process has led to improved compliance. “We haven't spent as much time on other registrants, and we still see room for improvement there,” she said.

Staff members said they see disclosures that seem inadequate or unlikely in a number of respects. Companies often fail to adequately explain the nature of the legal dispute or issue that remains unresolved, and they often fail to provide any adequate sense of any loss that might be reasonably possible. “We are doing deeper dives when a registrant makes an assertion that they cannot estimate reasonably the range of possible loss,” Shah said. Especially when legal disputes seem reasonably far along or when companies may have some similar litigation history that could form the basis for reasonable estimates, SEC staff will look for better disclosures, she said.

The staff also is quick to question when companies settle a matter but provide no forewarning of it in a prior period. It seems unlikely a case could morph so quickly from being so uncertain that a possible loss cannot be estimated to being settled, Shah said. “We may try to understand what happened there,” she said. The staff also will question when companies attempt to “smooth in” accruals for reasonably possible losses – for example, accruing for a $100 million loss by recognizing $25 million in each of four periods. ASC 450 doesn't provide for such a gradual accrual, she said.

Providing additional words of advice, Shah said companies should assure their financial statement disclosures are consistent with other statements in footnotes and in other communications to investors, and stick to the language contained in the standard when attempting to explain contingencies. Words like “potential” can lead to interpretation and confusion, she said. Finally, Shah advised companies to be cautious about carrying forward disclosures from earlier statements with minor tweaks in the language. “It may actually be helpful to start with a blank sheet of paper,” she said.