Halloween wax teeth with lead--accounting for contingencies. (11.2.2007)

I don't know about you, but this past week the stories about lead in products from China really got me to thinking when I read that Halloween wax teeth from China were being recalled for lead content. Where will the lead discoveries end? Years ago we bought Halloween wax teeth for our sons.

In any event, back on topic, what, if anything, should audit committees think or do about this situation? "What," you say, "how can you mix audit committees with wax teeth from China containing lead"? Well . . . the answer is easy when viewed from the possibility that the U.S. company that sold the wax teeth may have product liability exposure, and the possibility of the U.S. company having to report a contingent liability in its financials. If the U.S. company is now concerned that it might be selling products that are made with unlawful amounts of lead, the U.S. company must undertake an appropriate investigation of that possibility. In light of the ongoing news about the lead in a wide variety of products from China, presumably a not insignificant number of U.S. companies might now be looking into this issue.

As I recently summarized, although the AICPA has recently determined to review SFAS No. 5, Accounting for Contingencies, as a long-term project, the rules for recording or disclosing various possible liabilities still are governed by SFAS No. 5, Financial Accounting Standards Board Interpretation No. 14, Regulation S-K Item 101, Description of Business, Regulation S-K Item 103, Legal Proceedings, Regulation S-K Item 303, Management's Discussion and Analysis of Financial Condition and Results of Operations, and SAB 92.

Pursuant to SFAS No. 5, after the existence of a possible liability is established, the probability that the loss or liability will occur is evaluated and classified as being probable, reasonably possible, or remote. If it is estimated that the actual occurrence of loss or liability is probable, and that the amount of the loss or liability can be reasonably estimated, the amount of the loss or liability is recorded in the financial statements as a dollar amount. If the probability that the loss or liability will occur is reasonably possible, or if the probability of occurrence is probable, but the amount of the loss or liability cannot be reasonably estimated, the amount of the loss or liability is not recorded as a dollar amount, but the financial statements should contain a disclosure describing the nature of the contingency and the estimated minimum and maximum ranges of possible loss or liability, or a statement that no estimate of the amount of the loss or liability can be made. Generally, no disclosure of the loss or liability is made if the probability of the occurrence is remote. With respect to an unasserted claim, when there is no indication that a potential plaintiff or claimant is aware of the possible claim, disclosure is required if it is probable that a claim will be made, and there is a reasonable possibility that the outcome of the claim or litigation will be unfavorable.

Have a good day.

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