Risk Management

Will FASB’s Breadcrumb Trail Remain?

The standard-setter will vote on whether to extend the comment period for a controversial disclosure rule that could open up companies to new lawsu...
Marie LeoneAugust 17, 2010

When the Financial Accounting Standards Board meets on August 18, it will decide whether to give companies more time to vet a proposed update to the rules that govern how companies account for contingent liabilities. FASB gave companies just a month to look over and comment on its proposed revisions (renamed Topic 450), which include controversial disclosure provisions. The provisions, say some observers, will provide a breadcrumb trail for plaintiffs’ attorneys who troll financial statements in the hope of finding information that can be used to launch legal actions against companies.

“It makes no sense to turn disclosure requirements into a source of expanded liability and new lawsuits,” wrote the U.S. Chamber of Commerce in a comment letter it filed with FASB on August 11. The Chamber, which represents more than 3 million American businesses and organizations, wants to see FASB abandon its current disclosure requirements in favor of rules that are more business-friendly.

So far, 25 letters — including comments from Eli Lilly, Verizon, Dow Chemical, and Dr. Pepper Snapple Group — have been sent to FASB, many asking for an extension to the August 20 comment deadline. Company executives say they haven’t had enough time to thoroughly assess the potential impacts of the provisions on their financial statements, or to draw up a worthwhile response to FASB.

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Most of the controversy centers on the detailed table information that is required to explain any contingencies arising from potential and ongoing lawsuits. The thinking is that revealing this kind of information would make it difficult for companies to defend themselves, infringe on attorney-client privilege, and require companies to disclose nonpublic information that could be used by plaintiffs’ lawyers to file additional lawsuits.

For example, the draft rule requires that companies disclose details about insurance coverage bought to protect them against losing a lawsuit, as well as the ordinarily confidential estimates of “average settlement amounts” related to suits. The proposal also requires companies to disclose any reputable scientific studies that indicate a potential significant hazard related to a company’s product or operation. This disclosure, says the Chamber, essentially advertises a company’s “potential vulnerability to an entire category of lawsuits, none of which have yet been asserted.”

Others agree. In his comment letter, Harvey Wagner, controller and chief accountant for First Energy, wrote that the Ohio-based energy provider has “significant concerns” about the proposed disclosure rules. Wagner noted that the disclosures related to litigation strategies and the assessment of potential exposures and likely outcomes “will require enterprises to provide sensitive and confidential information that could be severely prejudicial.”

This isn’t the first time the breadcrumb-trail objection has been lobbed at FASB. In 2006 the board released FIN 48 (now known as Topic 740), which requires companies to disclose what they keep in reserve to cover the possibility that the Internal Revenue Service or state tax officials might disallow certain tax treatments, such as claims for credits and deductions or exclusions of certain revenue from taxable income. After debating how much detailed information should be provided in the final rule, the board required only the aggregate reserve amount to be reported on the income statement, without forcing companies to itemize or describe the position.

“I think FIN 48 accomplished exactly what was intended,” Ed Trott, a former FASB member, told CFO earlier this year. “The IRS’s proposed rule makes it clear that [FASB] was able to provide information to investors without providing a gold mine of information to the IRS.” (In January, however, the IRS issued new proposed rules requiring more-detailed accounting of uncertain tax positions. The comment period for the IRS rule ended in June, and most observers expect to see a final rule out by the end of the year.)

It’s unclear how soon FASB will release its updated rule on contingencies, especially if the board agrees to extend the comment period. Another factor is the board’s announcement in June that it would amend its rule-release schedule to rein in what many observers said was an extremely aggressive timetable. Now FASB says it will only release up to four exposure drafts at one time, to give companies sufficient time to review them and comment on potential impacts.