FASB's further retreat from fair value

Fair value measurement of environmental loss contingency liabilities for acquired properties will not be required, after all.

With its release of FAS 141R-1 [Text], Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, FASB has marked a further retreat from liability (and asset) measurement at (acquisition-date) fair value. Under FAS 141R-1, dated April 1, 2009, measurement of contingencies at fair value is required only “if [it] ...can be determined." FASB gives no guidance in FAS 141R-1 about how to make that determination.

Under FAS 141R-1, if a company determines it cannot calculate fair value—e.g., because of uncertainty about factors affecting costs—then it is to apply FAS 5 and FIN 14 guidance. FAS 5 instructions allow a company to postpone recognition of a probable loss until it concludes it can reasonably estimate the amount of loss. FIN 14 allows the low value from a cost range to be the amount recognized—or no value at all—as a result of cost uncertainty.

Formerly under FAS 141R, Business Combinations, the draft revision of FAS 141 that preceded FASB's release of FAS 141R-1, companies were to measure and recognize loss contingency liabilities at fair value—period, no exceptions for uncertainty about costs. This applied for all contractual loss contingency liabilities and for noncontractual loss contingencies that were more likely than not to be liabilities. It was to be effective beginning in 2009.

Companies expressed issues with FAS 141R, however—many of them litigation-related, e.g., the difficulty of determining fair value for litigation-related contingencies, the concern for protection of supporting information that may be subject to attorney-client privilege, and the exposure of potentially prejudicial information in financial statements.

Acknowledging these issues, FASB showed in its February 25, 2009, board meeting (minutes) that it was backing away from a strict requirement for recognition at fair value. It indicated it would be making such recognition conditional on whether fair value was “reasonably estimable.” [See the March 3, 2009, post in Knowing Disclosure about FASB’s change of heart.]

Now FASB has retreated further. Under its just-released FAS 141R-1, FASB makes recognition at fair value contingent on whether fair value can be “determined,” leaving it up to companies how they go about that determination.