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The board responds to companies' distaste for its proposed rule on contingent liabilities.
Sarah Johnson, CFO.com | US
September 24, 2008
The Financial Accounting Standards Board has changed the deadline for when companies would have been required to provide new disclosures about their contingent liabilities under a controversial proposal.
Companies with a calendar fiscal year-end had been expected to comply with the rule in mid-December. At a board meeting today, FASB pushed off that date by another year after hearing that many companies could not implement a new policy for disclosing potential lawsuit liabilities in time. Plus, the board is still sifting through the wealth of feedback from lawyers, auditors, and financial statement preparers who worry the newly shared information would reveal confidential data and turn into an undeserved boon to the plaintiffs’ bar.
In the meantime, FASB will collect even more feedback by asking companies to do sample runs of its proposal along with an alternative method that has yet to be introduced. The rule overhauls FAS 5, Accounting for Contingencies — requiring companies to disclose "specific quantitative and qualitative information" about potential lawsuit liabilities — and changes the contingent losses that companies disclose under FAS 141(R), regarding mergers and acquisitions.
The board has received more than 235 letters to date, many of them not supportive of the rule. Small businesses and private companies were particularly concerned about their ability to comply by the end of the year, noted FASB project manager David Elsbree.
As written, FASB's proposal requires companies to disclose severe financial threats that are considered both remotely probable and likely to be resolved within a year. Investors have applauded the concept for giving them more information about companies' potential lawsuit liabilities and prodded FASB to expand the disclosure requirements even more.
At the same time, legal groups and companies have balked. "Plaintiffs might be encouraged to make wildly excessive claims, forcing companies to enter into quick settlement or risk disclosure," wrote Thomas Timko, chief accounting officer and controller of auto parts maker Delphi Corp., in his comment letter to FASB.
Last week, the American Bar Association asked FASB to delay the proposed rule and encourage more discussion from its constituents. "If adopted, the proposed amendments will have very profound and far-reaching effects on the business community, as well as the legal and accounting professions," president H. Thomas Wells wrote in a letter to FASB chairman Robert Herz.
The board plans to conduct field testing and collect more input from preparers and lawyers, as well as investors, in November and December using the current proposed rule and an alternative version. It plans to ask companies to draw up sample disclosures and see how the information looks under both proposals.