Monday, September 21, 2009

Financial Accounting Standards Board (FASB) Needs More Detailed Enclosure From Companies About Contingent Liabilities


It's been nearly a year since the Financial Accounting Standards Board stalled its project to require companies to provide new disclosures about potential losses from lawsuits. The controversial proposal had sent corporate attorneys and auditors into a tizzy over the prospect of having to include previously confidential data about litigation in financial statements and risk giving an undeserved boon to the plaintiffs' bar.

While FASB will likely still require companies to expand their disclosures about contingent liabilities, the board members are rethinking the plan. Still, they indicated at a meeting Wednesday they don't consider the project a high priority and will likely not have a final rule ready this year.

For the revised version of its changes to FAS 5, the accounting standard for contingencies, FASB will not require companies to provide information that they perceive to be prejudicial and that is confidential. Businesses also won't have to discuss offers made toward potential settlement agreements, even though investors asked for those details in comments on the initial proposal.

Under the earlier proposal, the board members decided that the new disclosures should focus on the contentions between a lawsuit's counterparties rather than predictions over its outcome. They also wanted companies to provide more detailed information about a loss contingency as the size of the loss grew and the litigation neared a resolution. In addition, the board specified that companies' summaries of relevant litigation be limited to publicly available information.

FASB received 241 letters commenting on its exposure draft for amending FAS 5 and FAS 141(R), which addresses how companies disclose contingent losses from mergers and acquisitions. Many of the comments were negative. For instance, Delphi controller Thomas Timko worried that the new disclosures would encourage plaintiffs "to make wildly excessive claims, forcing companies to enter into quick settlement or risk disclosure." And Rudolf Bless, chief accounting officer of Credit Suisse, wrote that "the newly proposed guidance will result in disclosing a laundry list of unsupportable claims which in no way would provide investors with a better ability to assess a realistic impact to future cash flows."

Critics also have said that the original proposal would have required companies to give too much insight into their confidence over lawsuit outcomes and put attorney-client privilege rights at risk.

Under current accounting rules, companies take a financial charge for a contingent loss only if they can estimate the loss and if it's probable that the loss has occurred. If those conditions are not met, companies must disclose a loss contingency only if there is a reasonable possibility that the loss has occurred.

The first proposal, introduced last June, would have required companies to disclose severe financial threats considered both remotely probable and likely to be resolved within a year. Companies would address threats that could have a material impact on their financial position, financial results, or cash flow.

Investors were for the most part the proposal's only supporters. In fact, investor groups prodded FASB to expand the disclosure requirements even more than it did, to threats that currently seem remote but carry the potential to spin out of control based on volume, such as subprime-mortgage exposure and asbestos litigation.

FASB will have to balance all sides as it goes back to the drawing board. Last September, when the board decided companies would have at least another year before having to comply with the new rules, it agreed to collect more feedback by asking companies to do sample runs of its first proposal and the alternative version currently being crafted. However, only a few companies have shown interest in participating.

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