Litigation Disclosures Under SFAS No. 5: A Study of Actual Cases

There is considerable diversity in interpretation and application of Statement of Financial Accounting Standards (SFAS) 5, which governs disclosure requirements for litigation and other uncertainties. A study was undertaken to explore implementation of SFAS 5 in practice and its effect on disclosure of: 1. entity size, 2. court level (trial or appeal court level), and 3. the mode in which the litigation is disposed of (by settlement or by court adjudication). The results indicate that nondisclosure of litigation contingencies is common, even at relatively high materiality levels. This may be attributable to the significant leeway afforded professional judgment in SFAS 5 and the legal profession's duty to act in the client's interest and preserve the attorney-client privilege. This indicates that financial statement disclosure guidelines should be improved to provide a much higher level of consistency.