By its August 8, 2008 deadline, FASB had received more than 200 letters commenting on its new, proposed standard for loss contingency disclosure requirements. The proposed standard is FASB’s Disclosure of Certain Loss Contingencies, released on June 5, 2008 as an exposure draft, File Reference No. 1600-100. It amends the loss contingency disclosure requirements of FAS 5 and FAS 141R.
Tim Reason reported in CFO.com on August 18, 2008, that the majority of the comments were negative, with “many arguing that the proposal should be scrapped in its entirety.” The Wall Street Journal (WSJ) opined in an editorial on August 7, 2008, that the proposed standard was “a wealth transfer from corporations to trial lawyers, [with] FASB doing no favors to the investors it claims to represent.”
It is not clear, however, that the WSJ editorial staff carefully read either the proposed standard or the primary standard it amends, FAS 5, Accounting for Contingencies, before composing its criticism. The WSJ editorial expressed concern, for example, that companies must set about calculating the fair value of uncertain contingencies, when actually the proposed standard imposes no new measurement requirements (measurement of historic costs under FAS 5 still applies) and the words “fair value” are no where in its text.
Separate from the proposed standard, it is FAS 141R, Business Combinations (Revised), that does require measurement of loss contingencies at fair value. FAS 141R pertains to the surviving entity in mergers and acquisitions, applies only to their acquired properties, and, as planned for the proposed standard, is effective beginning in 2009. It is FAS 141R, not the proposed standard, that requires measurement of those loss contingencies at fair value. What the proposed standard requires is that companies expand the information they disclose about those loss contingencies.
The WSJ editorial also asserted that under the current system (of FAS 5 requirements), a company discloses the potential cost of a contingency, such as a lawsuit, “only when the [company] believes it is ‘probable’” to result in a liability. (WSJ, 2008) In fact, under FAS 5, a company must disclose an estimated loss if a liability is at least reasonably possible, not just probable, or state that such an estimate cannot be made.
There clearly is some distress and uncertainty about the proposed standard’s requirements for loss contingency disclosure. Uncertainty appears to extend, as well, to correct application of the existing standard FAS 5.
[For more information, see Raymond Rose's "Expanded Disclosure Distress and Two Classes of Loss Contingencies," Environmental Claims Journal, Corporate Environmental Disclosure Column, Vol. 20, Issue 4, Oct-Dec 2008.]
