Estimating Loss: When and How to Calculate and Disclose Financial Reserves for FCPA Settlements (Part Three of Three)

When a company is involved in FCPA settlement negotiations with the government, it must consider whether those negotiations are likely to lead to a probable and estimable financial loss.  If so, the company may be required to reserve funds for the potential settlement and disclose its reserve in SEC filings.  When is setting a reserve appropriate?  How should that reserve be calculated?  When is disclosure of the reserve necessary?  This article is the third in a multi-part series addressing these and related crucial issues.  In particular, this article discusses how to calculate a reserve and how to craft the disclosures accompanying the setting of a reserve.  The first installment in the series discussed the accounting principles governing the setting of the reserve, examined when during an investigation a company should set a reserve and described who should be involved in setting the reserve.  The second article in the series discussed the issues a company should consider before setting a reserve, the risks related to setting reserves and the risks of miscalculating the reserve.  The final installment in the series will be a compendium of actual FCPA reserve-related disclosures from recent SEC filings compiled with help from Intelligize’s database and search tools.

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