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FASB chairmans defends contingency reporting



There's been quite a bit of critical attention paid here to the Financial Accounting Standard Board's proposal to require expanded reporting of contingent liabilities, "Disclosure of Certain Loss Contingencies--an amendment of FASB Statements No. 5 and 141(R)." So it seems it seems fair to note the comments from FASB's chairman, Robert H. Herz. In today's Wall Street Journal, Herz takes issue with the Journal's blistering of the proposal in last week's editorial, "FASB's Lawyer Bonanza."

Herz writes, "FASB Seeks to Inform Investors, Not Whack Companies":

The Financial Accounting Standards Board is not proposing that companies change their current accounting for the cost of ongoing litigation. Rather, our proposal would require additional disclosure in the footnotes to the financial statements. It is a proposal, not a "demand," and is subject to our normal extensive public due process.

Under the proposal, the amount that would be required to be disclosed is the claim amount, or, if there is no claim amount, the company's best estimate of its maximum exposure to loss. The Board attempted to insure the proposal would not require a company to "[show] its hand to plaintiffs' attorneys" as the editorial says. For example, the proposal allows companies to aggregate claim amounts, so that the plaintiffs attorneys would not be able to identify specific cases. We have also proposed an exemption for certain disclosure situations that would be clearly prejudicial to the company.

We've put the entire letter in the extended entry.

It appears that FASB has completed the online posting of comments to the proposal, reaching 226 as of last Friday. The deadline was August 8. Critics outnumber the supporters nine to one, we'd estimate (and supporters don't think it goes far enough).

FASB Seeks to Inform Investors, Not Whack Companies
I write in response to your editorial, "FASB's Lawyer Bonanza" (Review & Outlook, Aug. 7). The Financial Accounting Standards Board is not proposing that companies change their current accounting for the cost of ongoing litigation. Rather, our proposal would require additional disclosure in the footnotes to the financial statements. It is a proposal, not a "demand," and is subject to our normal extensive public due process.

Under the proposal, the amount that would be required to be disclosed is the claim amount, or, if there is no claim amount, the company's best estimate of its maximum exposure to loss. The Board attempted to insure the proposal would not require a company to "[show] its hand to plaintiffs' attorneys" as the editorial says. For example, the proposal allows companies to aggregate claim amounts, so that the plaintiffs attorneys would not be able to identify specific cases. We have also proposed an exemption for certain disclosure situations that would be clearly prejudicial to the company.

Moreover, the proposed disclosures would not require any estimates of fair value -- nor does the proposal involve any new fair value requirements. The words "fair value" are not even contained in the proposed statement.

It is because of the strong and extensive input we've received from investors who want greater transparency relating to a wide range of contingencies -- including litigation -- that we are proposing these expanded disclosures. The new disclosures are aimed at providing information earlier to existing and potential investors in order to give them a greater understanding of the risks companies are facing. We believe that information would improve their ability to make informed investment decisions.

Robert H. Herz
Chairman
Financial Accounting Standards Board
Norwalk, Conn.

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Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.