In implementing FASB's new standard FAS 141R, beginning in 2009, companies will apply requirements that differ from those of the older standard FAS 5 in recognizing and measuring loss contingencies, including environmental loss contingencies. Under FAS 141R, loss contingencies will be measured at acquisition-date fair value, for example, instead of historic value.
This new standard pertains only to a subset of companies, however, to the surviving entity in acquisitions and mergers, and applies only to their acquired properties, not to all the entity’s properties.
While FASB indicates it is proceeding slowly on the matter, it may well broaden its fair value measurement applications. Fair value measurement currently is required for asset retirement obligations and, with FAS 141R, extends to the loss contingencies of acquired properties. There is reason to believe it may be indicating the future for recognition and measurement of all loss contingencies.
Until that future, however, (acquiring) companies complying with FAS 141R will be creating for themselves a second class of loss contingencies. This will complicate their liability management for at least the near term. The newer class of loss contingencies under FAS 141R will have relatively greater liability value, which results from application of the more inclusive recognition criteria and the more realistic (fair value) measurement methods of FAS 141R as compared with those of FAS 5, used for the company’s older class of loss contingencies.
This second class of loss contingencies also will complicate investors, who must discern and evaluate companies that have two classes of loss contingencies and will have to compare them with most companies having one.
[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.]
