At the end of 2010, the SEC made clear that reporting companies’ loss contingency disclosures in periodic reports would be an area of focus.19 As such, it should come as no surprise that the SEC issued numerous comment letters questioning companies’ loss contingency disclosures during 2011. In reviewing recent SEC comment letters, two areas of focus were particularly evident.

First, the SEC asked issuers to revise their loss contingency disclosures to use the specifi c terms from Accounting Standards Codifi cation (ASC) 450 (probable, reasonably possible, remote), rather than other words such as ‘possible.’ In addition, when fi lers used phrases to describe the possible effect of a loss contingency, such as “material adverse,” the SEC questioned whether the phrase represented a higher threshold than “material” and requested that future “disclosures provide information in the context of that which is material to” the issuer’s fi nancial statements “rather than any variation thereof.” The clear lesson is that loss contingency disclosures should use the specifi c terms used in ASC 450 and provide information in the context of that which is “material” to an issuer’s fi nancial statements, without any qualifi ers.

Where an estimate of the reasonably possible loss is not provided, the SEC has generally required a statement that an estimate of the loss cannot be made. Issuers should be mindful, however, that the SEC has requested additional detailed information about the issuer’s efforts to estimate the possible loss and has issued comments to the effect that the SEC would expect issuers to be able to provide an estimate at some point in the lifecycle of the claim or litigation.

Second, the SEC issued comments asking for additional explanation and/or disclosure where litigation or claims were disclosed in the body of the reviewed periodic report pursuant to Item 103 of Regulation S-K, but for which there was not corresonding disclosure in the fi nancial statements pursuant to ASC 450. As such, if the issuer discloses litigation in the body of a periodic report, but does not provide disclosures related to the same matters in the fi nancial statements, the issuer should be prepared to explain and defend its reasoning for not including such disclosure.

Given the SEC’s focus on loss contingency disclosures, reporting companies should carefully review their proposed disclosures, with a particular focus on using the specifi c terms used in ASC 450 and carefully considering any differences between matters disclosed pursuant to Item 103 under Regulation S-K and in the fi nancial statements.