Roles affecting views on measurement options

How can role affect view on measurement options?

As noted in the March 5, 2009, post, companies applying FAS 5, Accounting for Contingencies, and FAS 141/141R, Business Combinations (Revised), have options for measuring loss contingency liability costs. Might individuals in key roles within a company take different views about those measurement options?

Here is a hypothetical example to consider with simplified viewpoints of individuals in four key roles—CEO, Plant Manager, CFO, and Environmental Manager.

A company has acknowledged a liability for an environmental cleanup loss contingency at a plant site. Now it must consider what liability cost to recognize. Individuals in key roles at the company independently come to these amounts for liability cost:

• Amount A: No value, i.e., there is too much uncertainty for cost to be reasonably estimated yet, so no liability should be recognized at this time.


• Amount B: $850,000, the most likely value for resolving this liability.


• Amount C: $400,000, the low value of a cost range.


• Amount D: $632,250, the expected present value (in year one) for resolution of this liability in year five, i.e., fair value.

Amount A—no value—is the view of a CEO concerned that recognition and disclosure of this environmental liability adversely may affect near-term stock price and thereby prefers to postpone recognition.

Amount B—the most likely value—is the take on the situation by a Plant Manager. He has overseen similar environmental cleanup. He believes he knows, from his experience, the most likely amount for this work.

Amount C—the low value of a range—is how a CFO sees it, who believes a liability should be on the books but wants only a minimum amount entered.

Amount D—expected present value (fair value)—is the view of an Environmental Manager. He would like the same measurement method used for all environmental liabilities, to the extent possible, so he can compare the resulting liability values. He would like this method to produce liability values that are realistic, as well. He has the job, after all, of recommending priorities and budgets for environmental liability management.

What is the measurement outcome that best meets the company’s needs for compliance and financial management?