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FASB litigation accounting VII: The prudence of delay

The Financial Accounting Standards Board has announced a delay and another round of reviews for its proposal, Disclosure of Certain Loss Contingencies-an amendment of FASB Statements No. 5 and 141(R)," responding to an outpouring of criticism from businesses, the legal profession, and trade associations. A statement following yesterday's board meeting:

The Board decided on a plan for redeliberations of its Exposure Draft, Disclosure of Certain Loss Contingencies. The Board directed the staff to prepare an alternative model that attempts to address the concerns that certain constituents raised about the Exposure Draft. This alternative model will be field tested along with the model in the Exposure Draft. The staff expects that field testing will take place during November and December 2008, and roundtable meetings will occur in either early January or March 2009. Board redeliberations are expected to begin in late March or April 2009. The Board also decided that any final Statement on this topic will be effective no sooner than for fiscal years ending after December 15, 2009.

In demanding more detailed reporting of the the potential losses resulting from litigation, FASB was going to force companies to show their legal hand to the very people suing them, violate attorney-client privilege, and in the process, require highly speculative commentary that could damage a company's reputation with investors. As the WSJ Law Blog wrote in August, imagine being Merck in past years and trying to report the costs that the Vioxx litigation would impose.

The only groups supporting the proposal -- in fact arguing that it didn't go far enough -- were "socially aware" investors and organized labor, presumably because it would allow them to substitute their priorities for the corporations' current profit motive. So FASB's decision should also be seen as a rebuff to the trial lawyers and class-action crowd who make their living from suing businesses.

FASB undoubtedly has more pressing issues to deal with at the moment, in any case.


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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.