As discussed in ASC 275-10-50-7
, a reporting entity should disclose certain significant estimates that affect the carrying amount of assets and liabilities, as well as those that were used in developing the disclosures related to gain or loss contingencies. ASC 275
provides criteria to help determine which estimates must be disclosed.
Excerpt from ASC 275-10-50-8
Disclosure regarding an estimate shall be made when known information available before the financial statements are issued or are available to be issued…indicates that both of the following criteria are met:
- It is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements will change in the near term due to one or more future confirming events...
- The effect of the change would be material to the financial statements.
A reporting entity should consider all information available before the financial statements are issued or available to be issued as defined in ASC 855
, Subsequent Events
, in assessing the above criteria. The assessment of the criteria for disclosure under ASC 275
should be performed separately from any assessment under ASC 855
. For example, an event subsequent to the balance sheet date may not meet the criteria for disclosure under ASC 855
, but disclosure may still be required under ASC 275
. As discussed in ASC 275-10-50
-9, such a disclosure should include a description of the uncertainty and indicate that it is at least reasonably possible that a change in the estimate will occur in the near term. Refer to FSP 28
for a further discussion of disclosure requirements related to subsequent events.
indicates that “reasonably possible” should be interpreted to mean that the likelihood of occurrence is more than remote but less than likely. As defined in ASC 275-10-20, “near term” should be interpreted as not exceeding one year from the date of the financial statements.
Reporting entities should consider risk-reduction activities when assessing whether the above criteria have been met. Disclosure is not required if a reporting entity concludes that the impact of a change in estimate would not be material as a result of risk-reduction activities. For example, a reporting entity may conclude that a change in the allowance for credit losses estimate would not have a material impact on the financial statements because of a requirement that customers prepay for orders if they do not pass a credit check. A reporting entity should assess materiality based on the magnitude of the potential change in the recorded amount and not the amount currently recorded (which could be zero).
Additionally, ASC 275-10-50
-15A clarifies how to assess materiality when considering the change in useful life of an intangible asset. The criterion would be met if a change in useful life of an intangible asset or a change in expected likelihood of renewal or extension of an intangible asset would be material either individually or in the aggregate by major intangible asset class.
includes a list of areas where these types of disclosures may be more common, though the list is not intended to be comprehensive.
Excerpt from ASC 275-10-50-15
The following are examples of assets and liabilities and related revenues and expenses, and of disclosure of gain or loss contingencies included in financial statements that, based on facts and circumstances existing at the date of the financial statements, may be based on estimates that are particularly sensitive to change in the near term:
- Inventory subject to rapid technological obsolescence
- Specialized equipment subject to technological obsolescence
- Valuation allowances for deferred tax assets based on future taxable income
- Capitalized motion picture film production costs
- Capitalized computer software costs
- Deferred policy acquisition costs of insurance entities
- Valuation allowances for commercial and real estate loans
- Environmental remediation-related obligations
- Litigation-related obligations
- Contingent liabilities for obligations of other entities
- Amounts reported for long-term obligations, such as amounts reported for pensions and postemployment benefits
- Estimated net proceeds recoverable, the provisions for expected loss to be incurred, or both, on disposition of a business or assets
- Amounts reported for long-term contracts.
Part of the challenge in determining the need for disclosure is assessing whether an estimate is subject to change in the near term. Example 24-1 illustrates the evaluation of whether a risk is subject to disclosure under ASC 275
EXAMPLE FSP 24-1
Disclosure of percentage-of-completion contract estimates
FSP Corp enters into a material long-term construction contract with a customer that is accounted for under the percentage-of-completion (POC) method in accordance with ASC 605-35
, Construction-Type and Production-Type Contracts
. Prior to year end, FSP Corp identifies an issue with the building site that may require additional construction costs of up to 50% of the original budget. Further survey of the land is required to determine the extent of additional construction and should be completed within six months. FSP Corp considers it reasonably possible that the additional costs will be incurred. The additional costs, if required, would represent a material increase in the budgeted amount.
Is disclosure required under ASC 275
Yes. This estimate would meet the criteria for disclosure under ASC 275-10-50-8
. FSP Corp considers the likelihood of incurring the additional costs as reasonably possible and the confirming event (the land survey) will occur in the near term. Additionally, the additional costs would be material. FSP Corp should disclose that it is at least reasonably possible that completion costs for the contract will materially increase in the near-term.
Based on the above facts, this change in estimate does not represent an error as contemplated by ASC 250
, Accounting Changes and Error Corrections
. Refer to FSP 30
for disclosure requirements related to errors in previously issued financial statements.
The SEC staff has frequently commented on significant estimates related to:
- Business combinations (estimates used in the valuation of acquired intangible assets and contingent consideration)
- Goodwill and asset impairments (estimates driving fair value in goodwill and asset impairment analysis)
- Contingencies (estimates of reasonably possible loss/range of reasonably possible losses or an explanation of why the reporting entity is unable to make such an estimate)
- Income taxes (valuation allowances and permanent reinvestment of foreign undistributed earnings assertion)
For more information on disclosure considerations related to business combinations, goodwill and asset impairments, contingencies, and income taxes, see FSP 17
, FSP 8
, FSP 23
, and FSP 16
Also refer to ASC 275-10-60
for references to additional examples of disclosures.