{"schema_version":2,"canonical_url":"https://asc.understandingaccounting.org/asc/275/","source":"FASB Accounting Standards Codification, Basic View","usage":"Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective.","number":"275","title":"Risks and Uncertainties","area":"Presentation","group":null,"subtopics":[{"number":"275-10","topic":"275","title":"Overall","area":"Presentation","paragraphs":74,"summary":"ASC 275-10 requires all entities to disclose, in the basic financial statements, information about risks and uncertainties existing at the balance sheet date in four areas: nature of operations (or, if principal operations have not commenced, current activities), the pervasive use of management estimates, certain significant estimates, and current vulnerability due to certain concentrations (275-10-50-1). The hallmark of the Subtopic is selectivity — disclosure is triggered only when specified screening criteria are met, generally when it is at least reasonably possible that a change or severe impact will occur in the near term and the effect would be material or severe (275-10-50-8; 275-10-50-16). It excludes risks from management/key personnel, proposed regulatory or accounting changes, internal control deficiencies, and acts of God, war, or sudden catastrophes (275-10-15-4).","concepts":["risks and uncertainties disclosure","nature of operations","use of estimates","significant estimates","near-term severe impact","concentrations","reasonably possible","group concentrations"],"categories":["Disclosure","Financial statement presentation","Contingencies and guarantees","Presentation"],"level":"intermediate","topic_title":"Risks and Uncertainties","sections":[{"number":"00","label":"00 Status","anchor":"00-status","is_sec":false,"groups":[{"block":null,"heading":null,"paragraphs":[{"citation":"275-10-00-1","para":"00-1","html":"The following table identifies the changes made to this Subtopic.
Financial statements provide information about certain current conditions and trends that help users in predicting reporting entities' future cash flows and results of operations. The quality of users' predictions depends to a significant degree on their assessment of the risks and uncertainties inherent in entities' operations and of the information about those operations that financial reporting provides.
The central feature of this Subtopic's disclosure requirements is selectivity: specified criteria serve to screen the host of risks and uncertainties that affect every entity so that required disclosures are limited to matters significant to a particular entity. The disclosures focus primarily on risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term or the near-term functioning of the reporting entity. The risks and uncertainties this Subtopic addresses can stem from any of the following: - a
The nature of the entity's operations, including the activities in which the entity is currently engaged if principal operations have not commenced
- b
The use of estimates in the preparation of the entity's financial statements
- c
Significant concentrations in certain aspects of the entity's operations.
This Subtopic does not prohibit disclosure of matters it does not require to be disclosed either because they do not meet the specified screening criteria or because they relate to risks and uncertainties that are outside the scope of this Subtopic.
Disclosure of the locations of a business entity's or not-for-profit entity's (NFP's) principal markets provides information useful in assessing risks and uncertainties related to the environments in which the entity operates. The risks and the uncertainties associated with selling products and services in various regions in the United States may differ significantly. And they do differ significantly from the risks and the uncertainties in selling products and services outside the United States. Knowing those environments in which an entity sells its products or provides services helps users of financial statements to assess certain risks based on day-to-day national and world events.
Information about the nature of operations is helpful because the various kinds of businesses in which reporting entities operate have diverse degrees and kinds of risks. Certain of these risks are inherent to the business in which an entity is engaged. By knowing the nature of an entity's business and the principal markets for its products or services, a financial statement user is alerted, indirectly, about the risks common to that business.
There is a need to communicate explicitly to users of financial reports that the inescapable use of estimates in the preparation of financial information, including the estimation of fair values for assets carried at such a basis, results in the reporting of values that are approximations rather than exact amounts. If users understand better the inherent limitations on precision in financial statements, they will be better able to make decisions. Estimates inherent in the current financial reporting process inevitably involve assumptions about future events. For example, estimating and constraining estimates of variable consideration to be included in the transaction price for a contract with a customer in accordance with paragraphs and measuring progress toward complete satisfaction of a performance obligation in accordance with paragraphs . For another example, carrying inventories measured using first-in, first-out (FIFO) at the lower of cost and net realizable value is based on an assumption that there will be sufficient demand for that product in the future to be able to sell the quantity on hand without incurring losses on the sales or, if net realizable value is used, that it can be estimated. Making reliable estimates for those matters is often difficult even in periods of economic stability; it is more so in periods of economic volatility. Although many users of financial statements are aware of that aspect of financial reporting, others often assume an unwarranted degree of reliability in financial statements. The disclosure required by this Subtopic should help dispel any of those erroneous assumptions. This Subtopic provides guidance on disclosure of current vulnerability due to certain concentrations but stops short of requiring disclosure of all concentrations.
Disclosing information to help users assess major risks and uncertainties is consistent with the established objectives of financial reporting.
The Scope Section of the Overall Subtopic establishes the pervasive scope for the Risks and Uncertainties Topic.
The guidance in the Risks and Uncertainties Topic applies to all entities.
The guidance in the Risks and Uncertainties Topic applies to financial statements prepared in conformity with generally accepted accounting principles (GAAP) and applies to all entities that issue such statements. While the guidance in this Topic applies to complete interim financial statements, it does not apply to condensed or summarized interim financial statements. If comparative financial statements are presented, the disclosure requirements apply only to the financial statements for the most recent fiscal period presented.
(P) December 16, 2027; (N) December 16, 2028
270-10-65-1The guidance in the Risks and Uncertainties Topic applies to financial statements prepared in conformity with generally accepted accounting principles (GAAP) and applies to all entities that issue such statements. While the guidance in this Topic applies to complete interim financial statements, it does not apply to condensed statements. If comparative financial statements are presented, the disclosure requirements apply only to the financial statements for the most recent fiscal period presented. The disclosure requirements do not encompass risks and uncertainties that might be associated with any of the following: - a
Management or key personnel
- b
Proposed changes in government regulations
- c
Proposed changes in accounting principles
- d
Deficiencies in the internal control structure
- e
The possible effects of acts of God, war, or sudden catastrophes.
Certain disclosure requirements in this Topic supplement the requirements of other authoritative Topics. In many cases, however, the disclosure requirements in this Topic, particularly those relating to certain significant estimates, will be met or partly met by compliance with such other Topics.
The disclosure requirements of this Topic in many circumstances are similar to or overlap the disclosure requirements in other Topics, for example, Topic 450 and, for public entities, Subtopic 280-10. The disclosure requirements of this Topic in many circumstances also are similar to or overlap the disclosure requirements of the Securities and Exchange Commission (SEC). This Topic does not alter the requirements of any other Topic or any SEC requirement. All of the disclosures required by this Subtopic shall be included in the basic financial statements. Reporting entities shall make disclosures in their financial statements about the risks and uncertainties existing as of the date of those statements in the following areas: - a
Nature of operations , including the activities in which the entity is currently engaged if principal operations have not commenced
- b
Use of estimates in the preparation of financial statements
- c
Certain significant estimates
- d
Current vulnerability due to certain concentrations.
These four areas of disclosure are not mutually exclusive. The information required by some may overlap. Accordingly, the disclosures required by this Subtopic may be combined in various ways, grouped together, or placed in diverse parts of the financial statements, or included as part of the disclosures made pursuant to the requirements of other Topics. If an entity has commenced planned principal operations, the entity's financial statements shall include a description of the major products or services the reporting entity sells or provides and its principal markets, including the locations of those markets. If the entity operates in more than one business, the disclosure also shall indicate the relative importance of its operations in each business and the basis for this determination—for example, assets, revenues, or earnings. Not-for-profit entities' (NFPs') disclosures should briefly describe the principal services performed by the entity and the revenue sources for the entity's services. Disclosures about the nature of operations or activities need not be quantified; relative importance could be conveyed by use of terms such as predominately, about equally, or major and other.
An entity that has not commenced principal operations shall provide disclosures about the risks and uncertainties related to the activities in which the entity is currently engaged and an understanding of what those activities are being directed toward.
See Examples 1 through 2 (paragraphs
) for illustrations of disclosure requirements for nature of operations.
Financial statements shall include an explanation that the preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires the use of management's estimates.
See Example 3 (paragraph
275-10-55-6) for an illustration of the disclosure requirements of the pervasiveness of estimates in the preparation of financial statements.
This Subtopic requires discussion of estimates when, based on known information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25), it is reasonably possible that the estimate will change in the near term and the effect of the change will be material. The estimate of the effect of a change in a condition, situation, or set of circumstances that existed at the date of the financial statements shall be disclosed and the evaluation shall be based on known information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25). Various Topics require disclosures about uncertainties addressed by those Topics. In particular, Subtopic 450-20 specifies disclosures to be made about contingencies that exist at the date of the financial statements. In addition to disclosures required by Topic 450 and other accounting Topics, this Subtopic requires disclosures regarding estimates used in the determination of the carrying amounts of assets or liabilities or in disclosure of gain or loss contingencies, as described below. Disclosure regarding an estimate shall be made when known information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that both of the following criteria are met: - a
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.
- b
The effect of the change would be material to the financial statements.
The disclosure shall indicate the nature of the uncertainty and include an indication that it is at least reasonably possible that a change in the estimate will occur in the near term. If the estimate involves a loss contingency covered by Subtopic 450-20, the disclosure also shall include an estimate of the possible loss or range of loss, or state that such an estimate cannot be made. Disclosure of the factors that cause the estimate to be sensitive to change is encouraged but not required. The words reasonably possible need not be used in the disclosures required by this Subtopic. Many entities use risk-reduction techniques to mitigate losses or the uncertainty that may result from future events. If the entity determines that the criteria in paragraph 275-10-50-8 are not met as a result of risk-reduction techniques, the disclosures described in the preceding paragraph and disclosure of the risk-reduction techniques are encouraged but not required. This Subtopic's disclosure requirements are separate from and do not change in any way the disclosure requirements or criteria of Topic 450; rather, the disclosures required under this Subtopic supplement the disclosures required under that Topic as follows: - a
If an estimate (including estimates that involve contingencies covered by Topic 450) meets the criteria for disclosure under paragraph 275-10-50-8, this Subtopic requires disclosure of an indication that it is at least reasonably possible that a change in the estimate will occur in the near term; Topic 450 does not distinguish between near-term and long-term contingencies. - b
An estimate that does not involve a contingency covered by Topic 450, such as estimates associated with long-term operating assets and amounts reported under profitable long-term contracts, may meet the criteria in paragraph 275-10-50-8. This Subtopic requires disclosure of the nature of the estimate and an indication that it is at least reasonably possible that a change in the estimate will occur in the near term.
If a loss contingency meets the criteria for disclosure under both Topic 450 and paragraph 275-10-50-8, this Subtopic requires disclosure that it is at least reasonably possible that future events confirming the fact of the loss or the change in the estimated amount of the loss will occur in the near term. The requirements of paragraph 275-10-50-8 are applicable to long-lived assets whose value may become impaired in the near term (see Subtopic 360-10). Whether an estimate meets the criteria for disclosure under this Subtopic does not depend on the amount that has been reported in the financial statements, but rather on the materiality of the effect that using a different estimate would have had on the financial statements. Simply because an estimate resulted in the recognition of a small financial statement amount, or no amount, does not mean that disclosure is not required under this Subtopic.
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: - a
Inventory subject to rapid technological obsolescence
- b
Specialized equipment subject to technological obsolescence
- c
Valuation allowances for deferred tax assets based on future taxable income
- d
Capitalized motion picture film production costs
- e
Capitalized computer software costs
- f
Deferred policy acquisition costs of insurance entities
- g
Valuation allowances for commercial and real estate loans
- h
Environmental remediation-related obligations
- i
Litigation-related obligations
- j
Contingent liabilities for obligations of other entities
- k
Amounts reported for long-term obligations, such as amounts reported for pensions and postemployment benefits
- l
Estimated net proceeds recoverable, the provisions for expected loss to be incurred, or both, on disposition of a business or assets
- m
Amounts reported for long-term contracts.
The above list is not intended to be all-inclusive. See Section 275-10-60 for links to illustrations of the disclosure requirements that are contained in other Topics. In determining whether disclosure about an estimate of the useful life of an intangible asset is required under paragraph 275-10-50-8, the criterion in item (b) of that paragraph shall be considered met if the effect of either of the following would be material to the financial statements, either individually or in aggregate by major intangible asset class: - a
A change in the useful life of an intangible
- b
A change in the expected likelihood of renewal or extension of an intangible asset.
Vulnerability from concentrations arises because an entity is exposed to risk of loss greater than it would have had it mitigated its risk through diversification. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. Financial statements shall disclose the concentrations described in paragraph 275-10-50-18 if, based on information known to management before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25), all of the following criteria are met: - a
The concentration exists at the date of the financial statements.
- b
The concentration makes the entity vulnerable to the risk of a near-term severe impact. - c
It is at least reasonably possible that the events that could cause the severe impact will occur in the near term.
This Subtopic requires disclosure of certain defined concentrations known to management rather than a wider range of concentrations based on information of which management is reasonably expected to have knowledge.
Concentrations, including known group concentrations, described below require disclosure if they meet the criteria of paragraph 275-10-50-16. (Group concentrations exist if a number of counterparties or items that have similar economic characteristics collectively expose the reporting entity to a particular kind of risk.) Some concentrations may fall into more than one of the following categories: - a
Concentrations in the volume of business transacted with a particular customer, supplier, lender, grantor, or contributor. The potential for the severe impact can result, for example, from total or partial loss of the business relationship. For purposes of this Subtopic, it is always considered at least reasonably possible that any customer, grantor, or contributor will be lost in the near term.
- b
Concentrations in revenue from particular products, services, or fund-raising events. The potential for the severe impact can result, for example, from volume or price changes or the loss of patent protection for the particular source of revenue.
- c
Concentrations in the available sources of supply of materials, labor, or services, or of licenses or other rights used in the entity's operations. The potential for the severe impact can result, for example, from changes in the availability to the entity of a resource or a right.
- d
Concentrations in the market or geographic area in which an entity conducts its operations. The potential for the severe impact can result, for example, from negative effects of the economic and political forces within the market or geographic area. For purposes of this Subtopic, it is always considered at least reasonably possible that operations located outside an entity's home country will be disrupted in the near term.
Concentrations of financial instruments, and other concentrations not described in the preceding paragraph, are not addressed in this Subtopic. However, these other concentrations may be required to be disclosed pursuant to other Topics, such as Subtopic 825-10 . Disclosure of concentrations meeting the criteria of paragraph 275-10-50-16 shall include information that is adequate to inform users of the general nature of the risk associated with the concentration. For those concentrations of labor (see paragraph 275-10-50-18(c)) subject to collective bargaining agreements and concentrations of operations located outside of the entity's home country (see paragraph 275-10-50-18(d)) that meet the criteria in paragraph 275-10-50-16, the following specific disclosures are required: - a
For labor subject to collective bargaining agreements, disclosure shall include both the percentage of the labor force covered by a collective bargaining agreement and the percentage of the labor force covered by a collective bargaining agreement that will expire within one year.
- b
For operations located outside the entity's home country, disclosure shall include the carrying amounts of net assets and the geographic areas in which they are located.
This Subtopic does not, however, prohibit entities from also stating in disclosures of concentrations related to customers, grantors, or contributors or operations located outside the entity's home country that the entity does not expect that the business relationship will be lost or does not expect that the foreign operations will be disrupted if such is the case. Adequate information about some concentrations may already be presented in other parts of the financial statements. For example, adequate information about assets or operations located outside the entity's home country may be included in disclosures made to comply with Subtopic 280-10. In accordance with the guidance in this Subtopic, such information need not be repeated. See Examples 2 and 4 through 8 (paragraphs
275-10-55-4 and
) for illustrations of the disclosure requirements for current vulnerability due to certain concentrations.
An assessment of whether a disclosure is required should not be found to be in error simply as a result of future events. For example, reporting a concentration not followed by a severe impact does not imply that the disclosure should not have been made, because something that has only a reasonably possible chance of occurring obviously might not occur. Similarly, the occurrence of a severe impact related to a concentration not disclosed in the prior-year financial statements would not suggest noncompliance with the requirements of this Subtopic if an appropriate judgment had been made that a near-term severe impact was not at least reasonably possible at the prior reporting date. In addition, a severe impact may arise from a concentration of which management did not have knowledge at the time the financial statements were issued.
The kinds of disclosures required by this Subtopic are illustrated in this Section. Each consists of a situation in which the disclosure would likely be made or not made and a discussion of how and why the illustrative disclosure complies with the requirements of this Subtopic or why no disclosure is required by this Subtopic. Some of the concentrations described in the Examples may illustrate more than one of the categories of concentrations given in paragraph 275-10-50-18(a) through (d). This Example illustrates the disclosures required by paragraph 275-10-50-2. Conglomerate, Inc. is a U.S.-based multinational entity. Conglomerate's principal lines of business are automotive products, aerospace products and technologies, textiles, and nonprescription health-care products. The principal markets for Conglomerate's automotive and aerospace products and technologies are European- and Far East-based industrial concerns. Textiles are sold primarily to U.S. clothing manufacturers, while nonprescription health-care products are sold to wholesale and retail distributors worldwide. The operations of Conglomerate in any one country are not significant in relation to its overall operations. The following illustrates disclosure of the nature of operations required by this Subtopic. Conglomerate, Inc. is a multinational manufacturer and engineering concern. The entity's principal lines of business are automotive products, aerospace products and technologies, textiles, and nonprescription health-care products, all of which are about equal in size based on sales. The principal markets for the automotive and aerospace products and technologies are European- and Far East-based industrial concerns. Textiles are sold primarily to domestic clothing manufacturers, while nonprescription health-care products are sold primarily to wholesale and retail distributors worldwide.
This disclosure provides all of the following: - a
Information necessary for users not familiar with the operations of Conglomerate to identify and consider the broad risks and uncertainties associated with the businesses and markets in which it operates and competes. From the disclosures provided, financial statement users having a general knowledge of business matters should be able to assess that Conglomerate's product lines are subject to different and varied risks. Those financial statement users familiar with the businesses recognize the general risks associated with each of these businesses and their related markets.
- b
Information that facilitates the overall understanding of the financial information presented. This kind of disclosure could provide users with a basis for comparing an entity's financial information with that of competitors or with applicable industry statistics.
- c
Insight into the location of Conglomerate's principal markets, although on a broad scale. Because Conglomerate's markets are so diverse, it likely would not be useful to enumerate the specific locations of the entity's markets. For this reason, the manner in which the information is disclosed in the illustrative disclosure is sufficient to meet the broad objectives of this Subtopic.
This Example illustrates one way to comply with the disclosures required by paragraph 275-10-50-2. NewCompany, Inc. (Company) is a business that has not commenced planned principal operations. The Company is designed to develop and manufacture specialized environmental test equipment for measuring air quality. The Company's first product is a rapid-result test kit to identify certain airborne contaminants in high-risk environments. The Company's activities since inception have consisted principally of acquiring technology patents, raising capital, and performing research and development activities. The following illustrates disclosure required by this Subtopic of the nature of activities for an entity that has not commenced principal operations.NewCompany, Inc. (Company) is a business whose planned principal operations are the design, engineering, and manufacturing of air quality test equipment. The Company is currently conducting research and development activities to operationalize certain patented technology that the Company owns so it can manufacture rapid-result test kits for certain airborne contaminants in high-risk environments.
During the last year, the Company secured a research facility in Norwalk, Connecticut, which houses all of its employees and research and development activities. The Company also is in the process of raising additional equity capital to support the completion of its development activities to begin manufacturing the test kits as soon as possible.
The Company's activities are subject to significant risks and uncertainties, including failing to secure additional funding to operationalize the Company's current technology before another company develops similar technology and test kits.
The disclosure in paragraph 275-10-55-3A provides all of the following:- a
Information necessary for financial statement users not familiar with the activities of the Company to identify and consider the broad risks and uncertainties associated with businesses that have activities that are similar to those in which the Company is engaged. From the disclosures provided, financial statement users that have a general knowledge of business matters should be able to assess both of the following:
- 1
That the Company's activities are subject to different and varied risks, including the risk that the entity may be affected by the rapidly changing and intensely competitive technology market
- 2
That the Company is dependent on additional capital resources for the continuation and expansion of its business activities.
- b
Information that facilitates the overall understanding of the financial information provided. That kind of disclosure could provide users with a basis for understanding the Company's financial information and comparing that information with similar entities or other relevant statistics.
This Example illustrates the disclosures required by paragraphs 275-10-50-2 and 275-10-50-16. Smith Corporation, formerly Smith Munitions Corporation, was founded in 1940. At that time, Smith's principal business was the design and manufacture of artillery ammunition and other explosives. In 1959, commensurate with the evolution of its principal business to the design, engineering, and manufacture of military aircraft for sale to the U.S. government, Smith changed its name to Smith Corporation. Smith has one factory, located in New York. The following illustrates disclosure of the nature of operations required by this Subtopic. This disclosure provides all of the following: - a
Information needed by users who are not familiar with the operations of Smith Corporation to identify and consider the broad risks and uncertainties faced by all or most entities operating in a specific business or market, which in this case is the defense contracting business. From this disclosure, financial statement users having a general knowledge of business matters should know that Smith's business may be heavily affected by future changes in U.S. defense and foreign policies.
- b
Information that aids in the overall understanding of the other financial information presented. Certain accounting procedures involving estimation may apply only to particular industries or may be relevant in comparing a business entity's financial statements with those of business entities in other industries.
- c
Insight into the location of Smith's principal product markets and information about its current vulnerability due to concentrations. Users would be able to recognize and assess Smith's dependency on sales to the U.S. government (assuming the loss of the government as a customer would result in a near-term severe impact to Smith Corporation).
The following illustrates disclosure of the pervasiveness of estimates in the financial statements of all reporting entities as required by paragraph 275-10-50-4. This disclosure is intended to inform users of the inherent uncertainties in measuring assets and liabilities and related revenues and expenses and contingent assets and liabilities, and that subsequent resolution of some matters could differ significantly from the resolution that is currently expected. Such disclosure alerts users that uncertainties are present in the financial statements of all reporting entities.
This Example illustrates the disclosures required by paragraph 275-10-50-16. Hi-Tech Corporation is a manufacturer of electronic equipment in which integrated circuits are an important component. Substantially all of Hi-Tech's customers require that only those vendors that meet quality criteria be used as sources for integrated circuits. Hi-Tech currently buys all of its integrated circuits from one manufacturer in the Far East, and no long-term supply contract exists. There are only a limited number of manufacturers of these particular integrated circuits, and a change of supplier could significantly disrupt the business due to the time it would take to locate and qualify a new vendor. The following illustrates the disclosure required by this Subtopic. The entity currently buys all of its integrated circuits, an important component of its products, from one supplier. Although there are a limited number of manufacturers of the particular integrated circuits, management believes that other suppliers could provide similar integrated circuits on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely.
Although other sources of supply of this particular kind of integrated circuit are currently available, the limited number of such sources and the time it takes to qualify new vendors makes Hi-Tech currently vulnerable to the risk of a near-term severe impact. Disclosure is required because it is considered at least reasonably possible, based on information known to management before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25), that the events that could cause the severe impact will occur. This Example illustrates the disclosures required by paragraph 275-10-50-16. Minnesota Company manufactures various products in which wheat is an important raw material. It currently buys 80 percent of its wheat from one supplier, but numerous alternate sources of supply are readily available on comparable terms. No disclosure is required.
The concentration exists at the date of the financial statements, and an inability to obtain wheat could result in a near-term severe impact. No disclosure is required, however, because numerous alternative suppliers are available and, therefore, it is not considered at least reasonably possible that events that could cause a near-term severe impact will occur.
This Example illustrates the disclosures required by paragraph 275-10-50-16. Felt Pharmaceutical Company is a national pharmaceutical manufacturer headquartered in Atlanta, Georgia. Felt markets a wide range of pharmaceutical products. One of its better-known name-brand products, a significant source of profits and cash flow, is an antibiotic on which there is a patent that will expire in six months. Competitors are preparing to enter the market with generic alternatives when Felt's patent expires, and the concentration therefore has the potential for a severe impact. The following illustrates the disclosure required by this Subtopic. The disclosure focuses on the nature of the business and on Felt's current vulnerability due to a concentration of its patented products. Disclosure is required because the concentration exists at the date of the financial statements, because the effect on Felt's cash flows and profitability of competitors entering the market when the patent expires could be a severe impact, and because it is considered at least reasonably possible that the events that could cause the severe impact will occur in the near term. Because the risk is evident from the description of the concentration, no further explanation of the risk is necessary.
This Example illustrates the disclosures required by paragraph 275-10-50-16. Team Company is a manufacturer of industrial hardware. The contract with the union representing Team's labor force is due to expire in the coming year. Over the past 30 years, Team has, in rare instances, been affected by work stoppages in the course of contract negotiations; the stoppages have always been of short duration, and none has had a significant effect on Team's financial statements. Although management expects that there will initially be some differences between its offer to the union and union demands, based on preliminary discussions with union leaders, management believes it is very unlikely that those differences will result in a protracted conflict. No disclosure is required.
Although the concentration of labor exists at the date of the financial statements and it could result in a severe impact in the near term due to the potential of a protracted work stoppage, no disclosure is required because it is not considered at least reasonably possible in the light of past experience and current conditions that a protracted work stoppage will take place.
This Example illustrates the disclosures required by paragraph 275-10-50-16. Offshore Productions, Inc., a Delaware corporation, designs and manufactures optical lenses, which it markets throughout the United States. Substantially all of its manufacturing operations are carried out in a single facility, which is located in Switzerland and which is owned by Offshore's subsidiary. Offshore does not carry insurance for risks of loss. Offshore's consolidated balance sheet includes $20 million representing the net assets of those operations. The following illustrates the disclosure required by this Subtopic. Included in the entity's consolidated balance sheet at December 31, 20X4, are the net assets of the entity's manufacturing operations, all of which are located in a single facility in Switzerland and which total approximately $20 million.
All of Offshore's specialized manufacturing capacity is concentrated in a single facility. As noted in paragraph 275-10-50-18, it is always considered at least reasonably possible that the use of a facility located outside of an entity's home country could be disrupted in the near term. Due to the specialized nature of the assets, it would not be possible to find replacement capacity quickly. Accordingly, loss of the facility could produce a near-term severe impact to Offshore. This disclosure informs financial statement users of that concentration of operations in a particular geographic area and informs them of the risks and uncertainties associated with the concentration. Because the concentration is one of operations located outside of Offshore's home country, the disclosure also sets forth the carrying amount of the net assets, as required by this Subtopic. See paragraph
270-10-50-6 for guidance on disclosure of contingencies in summarized interim financial information of publicly traded entities.
(P) December 16, 2027; (N) December 16, 2028
270-10-65-1See paragraph 270-10-50-69 for guidance on disclosure of contingencies in interim financial statements and notes in accordance with generally accepted accounting principles.See Example 1 (paragraph 330-10-55-8) for an illustration of the kinds of disclosures required for risks and uncertainties related to inventory. See Example 12 (paragraphs
) for an illustration of the kinds of disclosures required for risks and uncertainties related to specialized manufacturing equipment.
See Example 1 (paragraph
410-30-55-7) for an illustration of the kinds of disclosures required for risks and uncertainties related to environmental remediation liabilities.
See Example 3 (paragraphs
450-20-55-36) for an illustration of the kinds of disclosures required for risks and uncertainties related to loss contingencies.
See Example 1 (paragraph
460-10-55-25) for an illustration of the kinds of disclosures required for risks and uncertainties related to guarantees of debt.
See paragraphs for disclosures of revenue from contracts with customers. See Example 31 (paragraph
740-10-55-218) for an illustration of the kinds of disclosures required for risks and uncertainties related to income taxes.
See Example 12 (paragraph
958-605-55-69) for an illustration of the kinds of disclosures required for risks and uncertainties related to contributions.
See Example 1 (paragraph
985-20-55-23) for an illustration of the kinds of disclosures for risks and uncertainties related to capitalized software costs.
The following table identifies the changes made to this Subtopic.
This Subtopic provides guidance to government contractors related to incremental disclosures about risks and uncertainties associated with contracts terminated for the convenience of the government.
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section
912-10-15.
In some circumstances it will be impossible to make a reasonable estimate of a termination claim in time for inclusion in the financial statements of the period in which the termination occurs. Effect may then be given in the statements to those parts of the termination claim that are determinable with reasonable certainty and disclosure made, by note or otherwise, of the status of the remainder.
If the contractor's claim includes items of known controversial nature it shall be stated at the amount estimated to be collectible. If a particular termination claim or part thereof is so uncertain in amount that it cannot be reasonably estimated, it is preferable not to give effect to that part of the claim in the financial statements. If the total of such undeterminable elements is material, the circumstances shall be disclosed in statements issued or available to be issued (as discussed in Section 855-10-25) before the removal of the uncertainty. In an extreme circumstance involving undeterminable claims, consideration shall be given to delaying the issuance of financial statements until necessary data are available. The effect of a contract termination shall be reflected in the financial statements of the contractor in the period in which the termination occurs, or earlier if the termination is a subsequent event occurring before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) and attributable to conditions that existed at the date of the balance sheet. If sufficient information is not available to predict the effect of a very recent termination, then the best information available shall be disclosed in the notes to financial statements in conformity with Topic 450. The effective date of termination shall be the date at which the contractor acquires the right to receive payment on the terminated portion of the contract. Significant items of a known controversial nature also shall be disclosed in the notes to financial statements, although estimates of ultimate amounts to be realized may not be determinable.
The government contractor is subject to a degree of risk different from its commercial counterpart because of the unilateral contract right of the government to terminate a contract. If there are indications that a contract termination may occur and the termination would have a material effect on the contractor's operations, disclosure of the circumstances and the potential effects shall be made in the notes to financial statements. Indicators of a potential contract termination include notice of a possible termination, contract performance problems, procurement cutbacks, and so forth.
Paragraph 420-10-50-1 provides guidance on information about contract terminations to be disclosed in notes to financial statements.