FAS 5 is in the draft amendment phase. There has been poor visibility on risk involved with contingent losses in the financials. Particularly, the amendment aims to improve assessment of loss probability, identify the periods it is expected to occur in and better quantify the amount of cash and/or assets that could be lost, including the effect on business.

As it is, FAS 5 puts a loss through earnings and on the balance sheet when the enterprise concludes it is probable and the amount of the loss is reasonably estimable. This does not change. The amendment focuses on the disclosure supporting the accrued loss contingency (probable loss) and for the two remaining characterizations of contingent loss, reasonably possible and remote.

As a general requirement, the proposed amendment calls for discussion of a contingency’s risk to the company’s business, as well as quantification. Summarily this means talking about what happens to earnings, cash flow and the balance sheet if the loss is realized and how the company bears those effects.

Additionally, the following revisions are proposed: (1) when it’s probable that an unasserted claim will be brought and possibility of loss from the unasserted claim is greater than remote, the new disclosure requirements are triggered, (2) remote loss assessments continue to have no disclosure requirement, (3) however, regardless of the likelihood of loss, if a contingency will be resolved within one year of the financial statement date & the contingency could severely impact the entity’s business (earnings & cash flows), the disclosure requirements of the proposed amendment are triggered. Severe impact is defined as a higher threshold than material and involves significant disruption of the entity’s business as measured by earnings and cash flows.

The amended FAS 5 will differ from IFRS’s treatment of contingent losses principally on the last point. IAS 37 (Provisions, Contingent Liabilities & Contingent Assets) treats remote losses similar to the current FAS 5. It does not require any disclosure for remote loss contingencies, no matter the timing of resolution or potential severity of the contingency’s impact.

IAS 37 also addresses a contingent asset by providing for recognition of income when it is virtually certain. FAS 5 does not address contingent assets and allows for gain recognition only when realized.