Contingencies and Subsequent EventsPresentation Transcript
Financial Statement Workshop Contingency & Commitment Note Subsequent Events March 22, 2007 Jeff Carr [email_address] 301-903-2506 (GTN)
DOE Contingency Note--Table (in millions)
Spent Nuclear Fuel Litigation $6,717 $5,000
Other (LC&A) 119 58
TOTAL $6,836 $5,058
Contingent Liabilities (SGL 2920) have been recorded in STARS for amounts on this table
$119M in “Other” 2006 contingent liabilities resulted from 4 litigation/claim/assessment cases
1 case was for BPA and was reported to allottee 92
3 other cases were recorded to allottee 99
There are also 3 pages of disclosures (narratives) regarding various lawsuits, claims and assessments that DOE faces
PMA commitment table (purchases/sales) follows
SFFAS No. 5 defines a contingency as an existing condition, situation or set of circumstances involving uncertainty as to a possible gain or loss.
SFFAS No. 5 requires a liability to be recognized for loss contingencies when a past event or exchange transaction makes a future outflow or resources probable and measurable
A contingent liability (and expense) should be recorded in STARS for a loss contingency if the following conditions are met:
1) Information is available prior to the issuance of the financial statements indicates that it is probable (>80%) that a liability has incurred at September 30
2) The amount of the loss can be reasonably estimated
If both conditions are not met, a loss contingency may still be disclosed in the notes to the financial statements
Examples of Loss Contingencies:
Litigations, Claims & Assessments
Guarantee and Warranty Costs
Premiums and Coupons
Risk of loss due to lack of insurance coverage
DOE’s contingency footnote has been limited to litigation, claims and assessments.
Environmental Cleanup and Disposal Liabilities are disclosed in a separate footnote and handled separately.
The legal representation letter (& non-monetary loss memo) process will generate the needed information to prepare the DOE contingency footnote disclosures and any adjustments to the financial statements.
Legal Representation letter will likely be sent out in April from HQ CFO to HQ GC (similar to 2006)
Expected Changes to the letter for 2007
Reporting threshold will be $20M (individual cases and aggregate)
Verbiage regarding KPMG’s review of items below the threshold will be omitted (KPMG will work with OGC to have access to OGC’s database)
Will add language requesting that when the field office GC provides their response to HQ GC that a courtesy copy be provided to the field office CFO so they can determine if a contingent liability needs to be recorded
Due dates for responses from HQ GC to HQ CFO will be July 18 (3 rd quarter) and October 24 (YE)
For legal cases where the “potential loss” reporting threshold is met ($20M), HQ GC will provide responses to IG and HQ CFO Office that includes:
Nature of the matter
Progress of the case to date
The Government’s Response (or planned response)
Evaluation of the likelihood of unfavorable outcome ( Probable-likely to occur , reasonably possible or remote)
Estimate of the amount or range of potential loss
Name of Department and DOJ attorneys on case
If your GC’s response includes a legal claim that meets the contingent liability criteria (probable and measurable), your office will need to record entries in STARS.
Typically, the first entry will include:
DR SGL6800U900 (Future Funded Expense, Unfunded Cost)
CR SGL2920U000 (Contingent Liabilities, Not Cov. by Budg. Res.).
Use Program “1721277” for the SGL6800U900 entry
The HQ CFO office will check to see if any of these legal claims are paid from the Treasury Judgment Fund. If this occurs, the following entry would be recorded by HQ CFO Office:
DR SGL6730 (Imputed Costs)
CR SGL5780 (Imputed Financing Sources)
Use Program “1721277”
If you record any contingent liabilities entries in late October or early November for the SeptADJ1 period, please let me know.
Subsequent Events -Events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statements, that have a material effect on the financial statements and therefore require adjustment or disclosure in the statements.
Two Types of Subsequent Events:
TYPE 1 (adjusting events)
Events that provide additional information about conditions that existed at the balance sheet date and affect the estimates used in the process of preparing financial statements.
Management should use all information that becomes available prior to the issuance of the statements.
Financial Statements should be adjusted for any changes in estimates resulting from use of such information.
Examples of “Type 1” Subsequent Events
The settlement of litigation for an amount different form the liability recorded in the accounts would require adjustment on the financial statements if the events, such as personal injury or patent infringement, that gave rise to the litigation had taken place prior to the Balance Sheet date
A loss on an uncollectible trade account receivable as a result of a customer’s deteriorating financial condition leading to bankruptcy after the Balance Sheet date
An update of a cost estimate or a decision to change the work scope for an environmental cleanup project
The discovery of environmental or facility contamination that existed prior to the Balance Sheet date and will require clean-up
Two Types of Subsequent Events (cont.)
TYPE 2 (non-adjusting events)
Events that provide additional information about conditions that did NOT exist at the balance sheet date but arose after that date.
These events should not result in an adjustment to the financial statements
However, some of these events, may be of such a nature that disclosure of them is required to keep the financial statements from being misleading
Examples of “Type 2” Subsequent Events
Congress passed legislation in October 2007 which obligates DOE to pay claims to injured parties
Settlement of litigation when the event giving rise to the claim took place after September 30, 2007
Loss of plant or inventories as result of fire, flood or other natural disasters occurring after September 30, 2007
Losses on receivables resulting from conditions (such as customer’s major casualty) arising after September 30, 2007
An incident occurring after September 30, 2007 that creates new contamination of the environment or a facility
Call Memo from DOE CFO expected to go out in late September to program offices (Under Secretaries, Assistant Secretaries and Directors) with CCs to field office CFOs
Only need to report material items ($10M cost/loss used in 2006—$20M for 2007)
Required to provide “negative” responses too
4 Reporting Dates
October 19 (initial submission)
November 2 (completion of audit field work)
November 14 (support reclassified statements)
November 28 (support Federal Report of U.S.)
KPMG places significant reliance on subsequent event reporting as part of the DOE’s overall financial reporting process.
SAS No.1, section AU 560, defines subsequent events and auditor’s requirements for obtaining/reviewing these assertions from senior management.
The Department’s senior management has a responsibility to inform the Office of the CFO of subsequent events that may need to be disclosed or lead to an adjustment to the financial statements.
Failure to report subsequent events could lead to an incomplete/misleading representation of DOE’s financial statements and/or a finding that ICs over financial reporting are not effective.
Field Offices should have internal controls to assure subsequent events are identified and brought to the attention of the HQ as part of the Department’s financial reporting process.
Can your office implement ICs from other reporting processes (i.e. 2108 certifications) for your subsequent event reporting?
Subsequent Event responses should be an assertion from “senior management” in the program office after coordination and input from field office CFOs. (can add language to the call memo for this) .
Prefer Subsequent Event responses be a “scanned signed memo” sent to Jeffrey Carr via email as a PDF attachment.
Contact me if your office has any questions or are unsure whether a particular item should be reported.