Under 141R

What’s required for environmental disclosure under FAS 141R? This is the revised FASB statement that applies to “business combinations,” e.g., mergers and acquisitions, which is effective beginning December 15, 2008. (FASB prohibits early implementation.)

Here’s what FAS 141R requires in the initial disclosure that follows acquisition:

• Fair value amounts for environmental loss contingencies.
• Nature of the contingencies (both recognized and unrecognized contingencies).
• Range of outcomes (undiscounted) for the contingencies (recognized and unrecognized).

The acquirer has a “measurement period” of up to a year from the acquisition date to firm up its disclosure information. That is, the acquirer initially may report provisional amounts when information is incomplete. When the acquirer receives the information needed or learns it is not available, the measurement period is ended.

Here’s what FAS 141R requires in subsequent disclosure after the initial disclosure:

• Changes in recognized fair value amounts for the environmental loss contingencies.
• Changes in range of outcomes (undiscounted) for the contingencies (recognized and unrecognized).

The acquirer may obtain new information that could affect the value of its loss contingencies. It could be about when or how resolution of contingencies is expected, or about likelihood of being incurred as a liability, for example. The acquirer evaluates that information and reports whichever amount is higher, the loss contingency measured at fair value or as determined from application of FAS 5.

Yes, I agree that returning to use of FAS 5 for determining loss contingency amounts in subsequent reporting would seem a step backward after initial (and perhaps some subsequent) reporting using the process and rigor of fair value measurement. FASB’s explanation for this apparent “reversion” was that (1) non-acquiring companies still applied FAS 5 for loss contingencies and (2) FASB is underway with a larger effort in which it is reconsidering the best way to account for contingencies, having taken that as a project in September 2007.

Some expect at the conclusion of this effort that FASB will extend fair value measurement broadly to all loss contingencies formerly measured under FAS 5.