A recent district court
decision suggests that disclosure about an uncertainty under
Item 303 of Regulation S-K may not be required when a company
concludes that assertion of a claim relating to the uncertainty is
not considered to be probable. In In re SAIC, Inc. Securities
Litigation, the U.S. District Court for the Southern District
of New York dismissed the complaint upon reconsideration of its
earlier denial of a motion to dismiss because the court admitted
that its prior analysis of the accounting literature was flawed.
Topic 450-20-50-6 of the FASB Accounting Standards Codification
requires disclosure about an unasserted claim only if assertion of
the claim is probable and there is a reasonable possibility that
the outcome will be unfavorable. Given the absence of evidence in
SAIC that the assertion of a claim was probable, the court
held that the allegations did not support a finding that the
financial statements did not comply with GAAP. The court then held
that, similarly, the allegations would not support a finding that
disclosure about the uncertainty was required in the
Management's Discussion and Analysis (MD&A) by Item 303.
Item 303 mandates, in the first instance, that the uncertainty be
The plaintiffs had alleged that SAIC's financial statements
did not comply with GAAP because SAIC did not recognize, on a
timely basis, material charges relating to its having fraudulently
billed New York City for services under a service contract, the
CityTime project, performed by both SAIC and another company. In
addition, the plaintiffs had alleged that SAIC's financial
statements and MD&A did not appropriately disclose loss
contingencies related to the CityTime project. The court concluded
that the complaint did not present allegations that met the
probability requirement at the time SAIC filed the annual report on
Form 10-K containing the financial statements and the MD&A that
did not reflect the uncertainty relating to the CityTime
In its opinion, the court addressed the allegations that the
government had commenced and was prosecuting criminal cases against
non-SAIC employees involved in the CityTime project, and that SAIC
had commenced an internal investigation of the project and put the
person in charge of the CityTime project on administrative leave.
The court explained that these allegations did not undermine
SAIC's professional judgment that disclosure was not required
by GAAP and did not establish that "management (1) had
knowledge that the company could be implicated in the CityTime
project fraud or (2) could have predicted a material impact on the
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