Contingent Liabilities Draft Ignites Ire

The U.S. Chamber of Commerce and FEI are among those opposing the suggested changes to FAS 5.
Kate PlourdAugust 11, 2008

The U.S. Chamber of Commerce is speaking out sharply against the recent Financial Accounting Standards Board proposal to change accounting for contingent liabilities. The business-backed association claims that the Financial Accounting Standards Board’s exposure draft would force companies to provide immaterial or confidential information, and boost the ability of plaintiff lawyers to win lawsuits against companies.

At the same time, a letter sent to FASB jointly by the Committee on Corporate Reporting and the Committee on Government Business of Financial Executives International raised similarly strong objections.

In the nine-page U.S. Chamber comment letter to FASB, the Chamber urged it to abandon the proposed revisions for FAS 5, Accounting for Contingencies. The changes would “add uncertainty, complexity, new liability, and a great deal of cost while compelling companies to provide potentially unreliable, and often immaterial, information about pending litigation,” the letter said.

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The proposed new accounting standard, for which public comment was accepted through last Friday, would significantly alter FAS 5 by requiring companies to disclose “specific quantitative and qualitative information” about loss contingencies. The standard revision would also affect the contingent losses that companies must disclose under FAS 141, which applies in the wake of mergers and acquisitions.

The Chamber contends that if FASB adopts the proposed revisions it would exacerbate already excessive securities class action law suits. By forcing companies to disclose meritless claims, plaintiff lawyers would gain direct insight into a company’s trial strategies and litigation assessment and have a road map to sue. Also, it claims, the proposed disclosure would force companies to disclose information protected under attorney-client privilege, according to the Chamber.

Not only does the Chamber believe that the revisions would negatively impact companies, it contends that current disclosure requirements are enough. Investors now get ample information about the material aspects of loss contingencies from what companies already must disclose under current FAS 5 footnote requirements, as well as the Securities and Exchange Commission S-K Item 103 and Item 303, it believes.

In addition, the Chamber says that the increase of information available to investors could be confusing and misleading. “Legal outcomes are inherently difficult, if not impossible to predict,” the letter says. “Compelling companies to guess what the maximum liability might be, or the likely outcome, will undoubtedly lead to the disclosure of some arbitrary, unreliable amounts and outcomes.”

On a larger scale, the Chamber argues that the revisions would hurt progress towards IFRS convergence and undermine the global competitiveness of capital markets. It suggests that FASB synchronize revisions with the International Accounting Standards regulation that governs contingent liabilities and contingent assets (IAS 37.)

FEI agrees with the Chamber’s contentions that the proposal would be a boon for plaintiff lawyers. Through the two committees, it also claims that requiring expansive disclosure would benefit future investors rather than current shareholders. “Current shareholders should not be injured to serve the potential needs of other categories of financial statement users,” that letter says.

For the accounting profession, FEI says, there would have to be significant changes to current auditing guidelines and procedures in order to assure that the public accounting profession can accurately audit expanded disclosures. FEI also notes that the proposed requirements may conflict with Sections 302 and 906 of the Sarbanes Oxley Act requirements. “We do not see how in good faith that the CEO or CFO of any company which has significant litigation can sign these certifications,” the committees wrote.

A group of 31 senior finance executives signed the FEI’s letter, including the CFO, controller and senior vice president of Tyco International, John Davidson; Washington Post Co. CFO John B. Morse Jr., and Halliburton Co. CFO Mark A. McCollum.