Mash of measurement options for loss contingencies

Companies now face a mash of options on the matter of measuring liability costs for loss contingencies, including environmental loss contingencies.

Under FAS 5, Accounting for Contingencies, effective since 1975, and FIN 14, Reasonable Estimation of the Amount of a Loss, effective since 1976, a company can apply any of these measurement options in decisions about recognizing loss contingency liabilities:

• No value, i.e., no liability cost is recognized because the company finds it cannot be reasonably estimated yet.


• Most likely value, although the company has no instructions from FAS 5 or FIN 14 about how to determine it.


• Low value of a range (known minimum value), a company’s option if it can discern a cost range but cannot determine a most likely value within that range.

So, in applying FAS 5 (and FIN 14), if a company is uncertain about a liability cost, it can postpone recognition of the loss contingency (the no value option) or recognize the low value from a cost range.

FAS 141R, Business Combinations (Revised), scheduled to be effective beginning in 2009, took a different approach. It required loss contingency liability costs to be measured at fair value (period, no exceptions for uncertainty about cost). It referred companies to FAS 157, Fair Value Measurement, for measurement instructions.

As of February 25, 2009, however, the Financial Accounting Standards Board (FASB) has decided that companies need more measurement outcomes available under FAS 141/141R. So—now—a company should recognize a loss contingency liability cost at fair value—"if fair value can be reasonably estimated.” Otherwise, FAS 5 instructions apply.

Which means companies implementing FAS 141/141R or both FAS 5 and 141/141R have four options potentially applicable for liability costs, with considerably different measurement outcomes: no value, most likely value, low value, and fair value.

This is not necessarily a good development for companies managing environmental liabilities, i.e., for making decisions about resource allocation. It is not good news for investors and shareholder trying to evaluate environmental liabilities.

That is, how can differences in liability values among loss contingencies be adequately interpreted when they can result from differences in both the nature of the loss contingencies and the measurement options used to assign value?