A Roadmap to Accounting for Contingencies and Loss …

1 A Roadmap to Accounting for Contingencies and Loss Recoveries2019 The FASB Accounting Standards Codification material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, and is reproduced with publication contains general information only and Deloitte is not, by means of this publication, rendering Accounting , business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this used in this document, Deloitte means Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP, which are separate subsidiaries of Deloitte LLP.

2 Please see for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public 2019 Deloitte Development LLC. All rights Other Publications in Deloitte s Roadmap SeriesBusiness CombinationsBusiness Combinations SEC Reporting ConsiderationsCarve-Out TransactionsConsolidation Identifying a Controlling Financial InterestContracts on an Entity s Own EquityConvertible DebtDisposals of Long-Lived Assets and Discontinued OperationsDistinguishing Liabilities From EquityEarnings per ShareEnvironmental Obligations and Asset Retirement Obligations Equity Method Investments and Joint VenturesEquity Method Investees SEC Reporting ConsiderationsForeign Currency Transactions and TranslationsIncome TaxesInitial Public OfferingsLeasesNoncontrolling InterestsNon-GAAP Financial MeasuresRevenue RecognitionSEC Comment Letter Considerations, Including Industry InsightsSegment ReportingShare-Based Payment AwardsStatement of Cash FlowsComplimentary printed copies of Deloitte Roadmaps can be ordered (or preordered)

3 From Deloitte s Roadmap Store. ivAcknowledgmentsSusan Fennedy and Dennis Howell supervised the overall preparation of this Roadmap and extend their appreciation to Kelsey Barclay, whose significant contributions made the inaugural edition of this Roadmap would also like to acknowledge the members of our production group for their contributions especially Michael Lorenzo, the production group leader; Peter McLaughlin, who made the Accounting -speak understandable; Sandy Cluzet and Geri Driscoll, who copyedited the document; and Teri Asarito, David Frangione, and Lora Spickler-Alot, who designed the Roadmap s layout and graphics. They also wish to thank Deloitte Audit & Assurance Services professionals Laxmi Pabbaraju and Inderjeet Singh for their high-quality research and drafting; and Deloitte s Audit Services, particularly Meredith viiiContacts ixChapter 1 Overview Introduction History of Contingencies Guidance 1 Chapter 2 Loss Contingencies and Commitments Overview Relationship Between Recognized Loss Contingencies and Reserves Loss Contingency Scope Firmly Committed Executory Contracts Application of ASC 450 to Employee Benefit Arrangements Collectibility of Receivables Before the Adoption of ASU 2016-13 After the Adoption of ASU 2016-13 Differentiating Between Contingent Liabilities and Contractual or Legal Liabilities Elements of a Litigation Settlement Incurrence of a Future Cost of Doing

4 Business Income Statement Classification for Settlements With Customers and Vendors Recognition Assessing the Probability of Whether a Loss Has Been Incurred Probable, Reasonably Possible, and Remote Occurrence of a Business Combination or Successful Completion of an IPO Proposed Legislation Assessing Whether a Loss Is Reasonably Estimable General Reserves and Risk of Loss From Future Events Other Recognition Considerations Unasserted Claims Loss Recognition Before the Occurrence of a Casualty Event for an insurance Company Litigation, Claims, and Assessments 26viDeloitte | A Roadmap to Accounting for Contingencies and Loss Recoveries Evaluating the Impact of an Adverse Legal Judgment on the Recognition and Measurement of a Loss Contingency Accrual of Future Legal Costs Measurement Date for Stock Issued in Settlement of Litigation Recognition of Annual Bonus Plan Liabilities Injury or Damage Caused by Products Sold Threat of Expropriation Parent s Accounting for Guarantee of Subsidiary Debt Measurement Offer to Settle Litigation Comparison of the Probability-Based and Expected Value Cash Flow Accounting Models Application of Present-Value Techniques to the Measurement of a Contingent Liability Applicable Guidance to Discounting Contingent Liabilities Selection of an Appropriate Discount Rate Accounting for Subsequent Changes in the Discount Rate Change in Accounting Policy Related to Discounting of

5 Contingent Liabilities Consideration of Inflation Remeasurement and Derecognition of a Contingent Liability Remeasurement Derecognition When Settlement Is No Longer Considered Probable Balance Sheet Classification Disclosure Considerations Disclosure Considerations Under ASC 450-20 and ASC 275 Disclosure of Unasserted Claims Disclosure of Loss Contingencies Occurring After Year-End Disclosure of Firmly Committed Executory Contracts Subsequent-Event Considerations 52 Chapter 3 Gain Contingencies Overview Gain Contingency Scope Application of the Gain Contingency Model Legal Disputes and Legislative or Regulatory Approval Settling Litigation by Entering Into an Ongoing Business Relationship Gain Realization Contingent on Future Performance Requirements Gain Contingency Disclosure Subsequent-Event Considerations 63 Chapter 4 Loss Recoveries Overview Involuntary Conversions Loss Recovery and Gain Contingency Models Determinable and Indeterminable Mix of Loss Recovery and Gain Contingency Models 69viiContents insurance Deductible Business Interruption insurance Balance Sheet Presentation Offsetting Income Statement Classification of Loss Recoveries and Gain Contingencies Statement of Cash Flows Classification of insurance Proceeds Subsequent-Event Considerations 75 Appendix A Differences Between GAAP and ifrs Standards 77 Appendix B Titles of Standards and Other Literature 79 Appendix C Abbreviations 82viiiPrefaceNovember 2019To the clients, friends, and people of Deloitte:We are pleased to present the inaugural edition of A Roadmap to Accounting for Contingencies and Loss Recoveries.

6 This Roadmap provides Deloitte s insights into and interpretations of the Accounting guidance in ASC 4501 on loss Contingencies , gain Contingencies , and loss recoveries. The goal of this publication is to assist entities in understanding and applying ASC 450. Although this guidance has not changed significantly for decades, the application of the existing framework remains challenging at times because a significant amount of judgment may be required, including the likely need for legal interpretations. In addition to summarizing the Accounting framework in ASC 450 and providing an in-depth discussion of key concepts, the Roadmap includes examples to illustrate how these concepts may be applied in practice. This publication reflects guidance that is effective for public business entities for annual reporting periods beginning on or after January 1, 2019, including ASC 606 and ASC 842 related to revenue and leases, respectively.

7 We have specifically highlighted sections of the Roadmap that will be affected by an entity s adoption of ASU 2016-13, which addresses credit that this Roadmap is not a substitute for the exercise of professional judgment, which is often essential to applying the requirements of ASC 450. It is also not a substitute for consulting with Deloitte professionals on complex Accounting questions and to the Deloitte Accounting Research Tool (DART) may access any interim updates to this publication by selecting the document from the Roadmaps tab on DART s home page. If a Summary of Changes Since Issuance displays, subscribers can view those changes by clicking the related links or by opening the active version of the hope that you find this publication a valuable resource when considering the Accounting guidance on loss Contingencies , gain Contingencies , and loss ,Deloitte & Touche LLP1 For the full titles of standards, topics, and regulations used in this publication, see Appendix B.

8 For a list of abbreviations used in this publication, see Appendix C. ixContactsIf you have questions about the information in this publication, please contact any of the following Deloitte professionals:Dennis Howell Partner Audit & Assurance Deloitte & Touche LLP +1 203 761 3478 Fennedy Partner Audit & Assurance Deloitte & Touche LLP +1 415 783 7654 Carpenter Partner Audit & Assurance Deloitte & Touche LLP +1 203 761 3197 Perez Managing Director Audit & Assurance Deloitte & Touche LLP +1 203 761 3379 1 IntroductionThis Roadmap discusses the application of the guidance in ASC 450 on Contingencies and loss recoveries. The Accounting for Contingencies is derived from FASB Statement 5, which the FASB issued in 1975 and which was codified in ASC 450. That guidance has remained substantially unchanged. Questions about the guidance s scope and how to apply its recognition, measurement, and disclosure requirements continue to arise given the inherent uncertainty related to the Accounting for Contingencies and loss recoveries.

9 History of Contingencies GuidanceFASB Statement 5 established an Accounting and reporting framework for loss Contingencies and carried forward the conclusions of ARB 50 with respect to gain Contingencies and other disclosures. In 1976, the FASB clarified the use of a range as part of the estimation of a contingent liability in FIN 14. In July 2010, the FASB issued a proposed ASU that would have amended the ASC 450 disclosure requirements for loss Contingencies in response to concerns raised by investors and users of financial reporting that disclosures about loss Contingencies under the existing guidance in ASC 450 did not provide adequate and timely information to assist them in assessing the likelihood, timing, and amount of future cash outflows associated with loss Contingencies . In particular, the proposed ASU stated that [d]isclosure of asserted but remote loss Contingencies may be necessary, due to their nature, potential magnitude, or potential timing (if known) to inform users about the entity s vulnerability to a potential severe impact.

10 Further, the proposed ASU stated, [t]his proposed change in the disclosure threshold would expand the population of loss Contingencies that are required to be disclosed to achieve more timely disclosure of remote loss Contingencies with a potentially severe impact. The FASB did not proceed with finalizing the proposed ASU after consideration of comments received but rather directed the FASB staff to work with the staffs of the SEC and the PCAOB to understand their efforts in addressing investors concerns about the disclosure of certain loss Contingencies through increased focus on compliance with existing rules. In July 2012, the Board ultimately decided to remove the project on disclosures of certain loss Contingencies from its technical agenda. Given the concerns expressed by investors and users, compliance with the disclosure requirements of ASC 450 historically has been and continues to be an area of focus by the SEC staff in its review of a registrant s periodic | A Roadmap to Accounting for Contingencies and Loss Recoveries ASC Master GlossaryContingencyAn existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an entity that will ultimately be resolved when one or more future events occur or fail to ContingencyAn existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur.