Situations affecting views on measurement options

How can situation affect view on measurement options?

As noted in the March 5, 2009, post, companies applying FAS 5, Accounting for Contingencies, and FAS 141/141R, Business Combinations (Revised), have options for measuring loss contingency liability costs. Might companies in different situations take differing views about those measurement options?

Here is a hypothetical example to consider, with companies in three simplified situations—not looking to acquire or be acquired, being a prospective buyer, and being a prospective seller.

First is Company X, which is not looking to acquire other companies or be acquired. It wants liabilities minimized, quarter to quarter, including environmental liabilities.

So, it postpones recognition of environmental liabilities to the extent possible, i.e., those for which it cannot reasonably estimate costs. For those in which it can estimate costs, it recognizes only minimum liability values, i.e., the low value of a range (the known minimum value). Its view is to use measurement options (under FAS 5) to minimize near-term liability recognition.

Next is Company Y, a prospective buyer. It needs liability information about companies it is considering buying in order to develop offers and, potentially, negotiate price. It wants the environmental liabilities of those companies truely identified and realistically valued. Its view as a prospective buyer is that measurement options should enable that outcome.

Company Y, the prospective buyer, may take a different view after acquisition. It can postpone recognition of (contractual) liabilities (for the acquired properties) if it cannot reasonably estimate their fair value. This comes from FASB’s recent decision about FAS 141/141R. In which case, FAS 5 applies (for loss contingencies at acquired properties), if fair value cannot be reasonably estimated.

So, after acquisition, Company Y's view may come to resemble Company X's—which is to use measurement options (under FAS 141/141R and FAS 5) to minimize near-term liability recognition.

There is also Company Z, a prospective seller. It wants to be considered for purchase, so it is motivated to meet a prospective buyer’s information needs. Its view is to use measurement options for true identification and real valuation of environmental liabilities.

[See the March 6, 2009, post in Knowing Disclosure on how individual roles can affect views on measurement options.]