Beginning in 2009, public companies must recognize and disclose all material environmental indemnities and other contract-related liabilities assumed in a merger or business acquisition. With respect to potential liabilities under environmental remediation laws and other non-contractual liabilities, such as litigation contingencies, acquiring companies must recognize and disclose such potential liabilities if it is “more likely than not” that such liabilities exist as of the date of the merger or acquisition. Each noted environmental contingency must be recognized at its fair-market value as of the acquisition date.

This standard is at odds with the standard for recognizing loss contingencies found in the current version of Statement of Financial Accounting Standards No. 5, under which a liability is recognized if it is probable that it will be incurred and the amount of the loss can be reasonably estimated. Thus, recognition of a liability is contingent on the likelihood of a loss if the liability itself were established rather than the likelihood of liability being established. Conversely, under FAS 141(R), recognition of a liability depends on the likelihood of a liability finding, not the loss associated with that liability.

As stated, current standards require disclosure of a contingent liability if it is “probable” that liability will be incurred and the amount of the liability can be “reasonably estimated.” However, the Financial Accounting Standards Board (“FASB”) is considering a proposal that would change this standard and increase the scope of disclosures of environmental liabilities by all public companies, not just those involved in an acquisition or merger.

In June 2008, the FASB sought to expand disclosure of loss contingencies under FAS 5 with a proposed standard requiring disclosure of all loss contingencies with more than a remote chance of loss. Due to a flood of comments from auditors, attorneys, and lobbying groups, the FASB has delayed the implementation of the revised FAS 5 until at least December 15, 2009.

The promulgation of new accounting principles appears to be one example of a paradigm shift for disclosure standards relating to environmental and other contingencies. This shift favors market-based projections over the certainty of any contingent loss. If this trend continues, companies might be forced to revise estimates for environmental liabilities currently on their books.

Bernie Hawkins is a partner in the Columbia office of Nelson Mullins Riley & Scarborough. His practice focuses on environmental, health and safety, drug and medical device counseling and litigation. Cory Manning is a partner of  Nelson Mullins Riley & Scarborough in Columbia where he practices in business, securities, and product liability litigation as well as professional liability and class action defense. Bernie can be reached at bernie.hawkins@nelsonmullins.com, and Cory can be reached at cory.manning@nelsonmullins.com.