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Reacting to FASB's litigation-encouraging disclosure proposal

With the arrival of the September 20 deadline (extended from August 20), business groups have commented on the Financial Accounting Standards Board's proposal to require disclosures about contingent liabilities, the Exposure Draft, Topic 450, "Disclosure of Certain Loss Contingencies."

FASB has posted the comment letters online here.

While acknowledging the current proposal is improved over the previous iteration withdrawn in 2008, the criticism is still substantive. The Association of Corporate Counsel on Monday added 40 additional signatures to its Aug. 18 comment letter. Excerpt:

[As] a whole the Exposure Draft fails the key test for a change in standards as any foreseeable benefit from the proposal is far outweighed by the substantial problems that the proposal would create for public companies, their shareholders and financial statement users. In particular, we have serious concerns about the proposed requirement for disclosure of amounts accrued for individual loss contingencies and for disclosure of information about such accruals in a tabular reconciliation. We believe these requirements would harm shareholder and company interests as they would limit the ability to obtain shareholder-favorable settlements of litigation matters, otherwise hamper litigation strategy and potentially fuel additional litigation. We also are concerned that these accrual-related disclosure requirements could generate new tension surrounding issues of attorney-client privilege and work-product protections. The Exposure Draft also calls for enhanced disclosure of various information - disclosure of certain remote contingencies, amount of damages claimed, and insurance information - that has the potential to mislead financial statement users, on the one hand, and cause prejudicial impacts on litigation positions to the detriment of company and shareholder interests, on the other.

The National Association of Manufacturers, my employers, submitted its comment letter Monday. The U.S. Chamber of Commerce submitted its comments on Aug. 11. Mayer Brown has published a summary of the issues, "FASB revises its proposal regarding disclosure of loss contingencies." CFO.com previously reported, "Will FASB's Breadcrumb Trail Remain?"

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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.