Are revisions to SFAS no. 5 needed?

In the Financial Accounting Standards Board's (FASB) project, "Disclosure of Certain Loss Contingencies," a central issue underlying the debate is whether existing implementation of FASB Accounting Standards Codification Topic 450-20 (previously Statement of Financial Accounting Standards No. 5) provides sufficient and timely information to financial statement users. The Exposure Draft explains that constituents' assertions of inadequate disclosures are the primary motive underlying the FASB's re-examination of this issue (see, for example, page v of the Exposure Draft). However, little actual data are available to indicate the extent of the alleged problem. This manuscript presents the results of a study undertaken to provide such data. For a sample of litigation-related losses, we find a surprisingly large incidence of non-disclosure of contingent losses that cannot be readily explained. Moreover, even where there is disclosure, we find many cases where firms do not provide estimates of expected losses, presumably under the permitted exception for cases where firms claim to be unable to estimate the magnitude of expected losses. On the other hand, we find relatively frequent disclosure of the items called for in the Exposure Draft, consistent with the conjecture that at least some of these items are being demanded by users.