Results matching “FASB”

Since July 2008, we've been warning about dangerous proposals from the Financial Accounting Standards Board to change its Standard No. 5, and require financial disclosures about litigation that (1) would provide roadmaps to plaintiffs' lawyers already suing publicly-traded defendants; (2) create collateral opportunities for litigation for alleged failure to meet the standard; and (3) to avoid such collateral litigation, force defensive disclosures that would depress the stock price while litigation was pending and deter meritorious defenses against litigation. Alison Frankel informs us that FASB has finally dropped the proposal. [Reuters]

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While acknowledging the current proposal is improved over the previous iteration withdrawn in 2008, the criticism is still substantive.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?"

FASB extends comment period to September 30 - PointOfLaw Forum

Nye has details. Take advantage of the next five weeks and let FASB know what a disaster their proposed disclosure rules will be. Earlier.

WSJ: "FASB's Tort Bar Gift" - PointOfLaw Forum

Chamber of Commerce on FASB 5 - PointOfLaw Forum

The Chamber explains in detail why FASB 5 is a very bad idea that will simply encourage litigation. Earlier.

Around the web, August 12 - PointOfLaw Forum

  • NHTSA finally admits that driver error is the reason behind sudden acceleration to date. Meanwhile, in Minnesota, Koua Fong Lee, who killed two people when he drove his Toyota into an Oldsmobile at 70-90 mph, released from prison after blaming Toyota for his accident. [OL roundup; WaPo; see also O'Rourke quoted at Atlantic]
  • FASB resuscitates its horrible "Please disclose your litigation strategy and internal litigation estimates in your public filings so the other side knows how much to demand from you in settlement and can ensure that you pay even more if it goes to a jury trial" proposal. This really isn't getting enough attention. [Cal Biz Lit; Beck]
  • Eleventh Circuit adopts common-sense approach to removal jurisdiction. That's an improvement over its previous contrary-to-logic approach. [Drug & Device Law; Roe v. Michelin N. Am., Inc.]
  • Hearing ordered over Napoli Bern overcharging its clients in 9/11 litigation. [NYLJ]
  • FTC gets the right to manage design of Intel's new chips. (Disclosure: I briefly represented AMD as they were preparing their ultimately successful litigation against Intel, so I can't really speak about this case to the degree I wish to.) [Wright]
  • Oil-spill MDL assigned to former trial-lawyer judge in New Orleans. [WSJ]
  • iPhone evidence saves defendant from false rape charge. [Turley]

"Accounting Standards and Litigation Contingencies" - PointOfLaw Forum

Cornell accounting professor Robert Bloomfield (via Kenneth Anderson at Volokh) is soliciting reader input on how accounting standards should recognize litigation contingencies, a topic of much controversy earlier this year following initiatives from the FASB (Financial Accounting Standards Board), which is supporting Bloomfield's inquiries.

Around the web, April 25 - PointOfLaw Forum

Around the web, November 7 - PointOfLaw Forum

FASB litigation accounting VII: The prudence of delay - PointOfLaw Forum

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.

More....

Around the web, August 25 - PointOfLaw Forum

All-blog edition:

FASB chairmans defends contingency reporting - PointOfLaw Forum

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 litigation accounting VI - PointOfLaw Forum

FASB has updated its website this afternoon with comments submitted on its proposal to require more reporting on contingent liabilities resulting from litigation. (See earlier post, directly below.) We're up to 217 responses, and comments continue to be overwhelmingly critical.

And just to be clear about it, no matter how much the proposal is criticized by businesses -- who represent most of the comments -- we're not suggesting anything malign about FASB's proposal. The board's goal is improved transparency for investors and the public, which is a good thing, generally. The trouble is that the proposal could lead to misleading information and damaging, simply wrong statements being made public, while at the same time the attorney-client privilege is undermined. You could see how the pro-litigation crowd might take advantage of the the mixture of confusion and revealed strategies, but investors certainly aren't served by even more lawsuits.

BTW, we see that the Teamsters can be counted as members of the "pro-litigation crowd." James P. Hoffa's letter says FASB hasn't gone far enough in asking for disclosure of potential liabilities resulting from litigation.

Elsewhere, the WSJ Law Blog has a post on the drug companies' submission, using the Vioxx litigation as an example of circuitous litigation with hard-to-forecast contingencies. (We noted the blog comments at Shopfloor.org.)

The Washington Legal Foundation also submitted a letter that warrants notice. Excerpt:

The FASB has stated that investors and other users of financial statements have expressed concerns that the present rule is inadequate to aid financial statement users in assessing the likelihood, timing, and amount of future cash flows associated with loss contingencies. Exposure Draft, Summary. However, WLF does not believe that FASB has made a compelling case that the current standard, which has been in place for over 30 years, does not provide adequate information to investors. In that regard, we agree with the comments filed by Allergan on July 16, 2008, that only a few vocal proponents, unrepresentative of the investor community, are advocating this change and that the FASB should fully disclose to the public the empirical information it possessed that prompted these proposed changes.

Yes, indeed. Transparency.

UPDATE: More on the drug company submission at Pharmalot.

FASB litigation accounting V - PointOfLaw Forum

Letters poured into the Financial Accounting Standards Board with last Friday's deadline for comments on "Disclosure of Certain Loss Contingencies--an amendment of FASB Statements No. 5 and 141(R)." Corporations don't like the proposal because -- among other things -- it would require highly speculative reporting about the possible results of litigation, casting unnecessary doubt about a company while giving trial lawyers another edge in their suits. Bar and counsel associations contend the new rules would violate attorney-client privilege.

As of this writing, there are 165 entries on FASB's site, with well over 90 percent critical of the proposal, we'd say. The few in favor we find are "socially conscious" investors of one sort or another, including Trillium Asset Management Corporation, a group of charitable foundations, and the Social Investment Forum. From the latter's letter:

While we are pleased with this important step and supportive of the progress it represents, there are a few points of concern that we would like to take this opportunity to raise briefly. In particular, SIF is concerned with how the draft treats severe long-term risks. At FAS 5 Exposure Draft paragraph 6, the draft only requires disclosure of severe financial threats that a company deems remotely probable if the issue is expected to be resolved within a year. Many of SIF's members are long-term investors and are acutely aware that there is a long and troubled history of companies underestimating the likelihood of severe financial threats - Enron, the subprime lending crisis, and asbestos liabilities are three recent examples. All too often we have seen that these momentous issues were looming for many years and eventually resulted in catastrophic consequences for investors. For these reasons, we believe FAS 5 should require companies to disclose all known severe threats whether or not they are expected to be resolved within a year. Recognizing the need to ensure that disclosures are made in a cost effective manner, SIF would like to suggest that "remotely probable" risks that are not expected to be resolved within one year be described in a narrative form, but would not need to be quantified other than to specify that they may be severe.

The bolded sentence is rephrased and bolded in the other letters cited. Short version: Guestimate.

The Association of Corporate Counsel submitted a letter stating the basic objection to this sort of speculation:

Even if the disclosure of litigation-related loss contingencies were a serious systemic problem, it is extremely doubtful that compelling companies and their lawyers to quantify litigation risks would yield more accurate financial statements. As every trial lawyer knows, litigation anywhere in the world -- but especially in American courts and before American juries -- inherently is unpredictable. The reaction of a single juror or the impact of a single ruling can have a dramatic and unanticipated impact. Indeed, it is highly doubtful that any company or lawyer who ever lost a billion-dollar case expected that result -- they were presumably surprised by the extent of the negative outcome. Had they expected to lose or to lose so badly, they surely would have settled. In this instance, requiring the losing lawyer or company to have produced a more precise description of the outcome would not have provided more accurate disclosure to investors. In short, the case has not been made for change.

BTW, the 800 lbs. gorilla of Cal-Pers submitted a letter, calling for expanded reporting of these contingent liabilities. More nuanced than the "socially aware" investors, but same basic arguments.

For Walter Olson's previous posts, see here, here, here, and here.

FASB litigation accounting IV - PointOfLaw Forum

Beck and Herrmann weigh in with several links including one to the FASB's own page allowing the visitor to view copies of letters it's received commenting on the proposed standard. For example, V.P. and General Counsel Michael H. Gibbs of restaurant chain Whataburger writes:

1. There is absolutely no limit on what plaintiffs can demand - as such these outrageous demand amounts constitute hyperbole, disclosure of which has little, if any, bearing on what the actual reasonably estimable exposure might be.
2. These rules would require waiver of attorney client privilege for highly sensitive case assessment information in most states, including Texas.
3. These rules would therefore result in providing great benefits to plaintiff lawyers who would no doubt argue to juries that the maximum identified exposure is an admission of what should be paid (or at a minimum, the actual reserve would be such an admission). Notwithstanding the perceived benefit for accounting rules etc, what the jury will hear is "the company admits exposure of $ X".
4. Once disclosed or discoverable, the actual per claim reserve amount will become the floor demand of the other party in any dispute - after all, once reserved, it costs the company "nothing" from an accounting standpoint to pay that amount on that particular claim.
5. Perhaps worst of all, once individual case ranges are provided to accounting firms, it invites them to substitute their judgment for the professional opinion of counsel, as opposed to simply auditing the process used. If you give them numbers, they will be constitutionally incapable of avoiding the tendency to challenge the range, the probabilities, or any other calculations.

John A. Hepp of the Illinois CPA Society, on behalf of his society's relevant committee, deems the disclosure of short-term unlikely exposures "neither relevant nor beneficial":
The Committee is concerned that the inclusion of large numbers of cases, especially frivolous ones, will mask the actual exposure. There is an emerging body of academic research indicating that the "wordiness" of MD&A increases as news gets worse in an attempt to discourage users from reading the document or to overwhelm them with information in order to hide relevant disclosures.


And the U.S. Chamber's Institute for Legal Reform comments here. Earlier coverage here, here, and here.

More on litigation exposure projections - PointOfLaw Forum

The disturbing proposal before the Financial Accounting Standards Board, much discussed recently in this space, is the topic of an editorial in today's WSJ:

The proposed change is open for comment until tomorrow, and FASB has been getting an earful. Senior litigators from 13 companies, including Pfizer, General Electric, DuPont, Boeing and McDonald's have signed a letter to FASB Chairman Robert Herz, objecting to the plan. "Too often, lawsuits are filed for publicity or to pressure companies, only to be dropped later," they wrote, and trying to estimate the fair value of liabilities at the outset "would be both flawed and misleading."

All of which raises the question, why mess with the current system? Under existing rules, putting a number on the potential cost of a lawsuit is required only when the defendant believes it is "probable" it will lose the case. At that stage of the game, some knowledge and calculation from the trial can actually inform the judgment and provide a reasonable service to investors.

Reader Jeff Holmstrand, of Wheeling, W.V.'s McDermott & Bonenberger, writes to foresee another problem to add to the list catalogued earlier: "Outside counsel giving honest opinions about a company's potential exposure and then having to review the client's financial statements to determine whether that risk was accurately reported -- a problem made even worse when there is potential insurance coverage."

More: Some noteworthy comments filed with the FASB by the business community, along with other links and commentary, at NAM "Shop Floor".

FASB Standard 5, cont'd - PointOfLaw Forum

We've added several new links to our Monday post on this proposal (which would require much broader accounting disclosures than now as to how companies are being sued and might be sued in the future, and what the cases might be worth). Included are commentaries from Ted Frank, Larry Ribstein, and Kevin LaCroix, as well as links to some advocacy from proponents of the new standard.

The FASB public comment period ends August 8, not much more than a week from now.

Major news afoot from the accounting world as written up in Law.com's The Recorder:

... changes proposed by the Financial Accounting Standards Board that would force public companies to disclose more about the risks of litigation have caused a howl of protest among general counsel and corporate and defense lawyers.

Under the revised rules for FASB Statement No. 5 (pdf), the threshold for reporting the potential loss from a lawsuit would be lowered from "probable" to anything but "remote." Public companies would also have to estimate just how much legal threats might cost and the likely outcome. They'd also have to disclose more details about the underlying litigation and the reasoning behind their predictions.

Businesses and their lawyers are worried about the possible abrogation of attorney-client privileges involved. Such a change could handicap business defendants and benefit the plaintiff's bar in at least four other distinct ways (there may be other ways I haven't noticed yet):


  • The shareholders' bar would be furnished with new grounds for suing companies over insufficiently disclosed litigation risks.

  • The plaintiff's bar generally would acquire an immensely valuable new road map to where companies are being sued and how seriously they take possible exposures. At present, companies often try to minimize public attention to emerging or speculative areas of litigation for fear of encouraging copycat or bandwagon suits. The new disclosures would soon become a tip sheet for exactly such filings.

  • In the poker-style negotiations over how much a lawsuit should settle for, plaintiffs may obtain through the accounting disclosures a look at their adversary's hole card, their evaluation of what the claim is "really" worth. Supposedly there'll be "an exemption from disclosing information that could hurt a party's position. But defense lawyers aren't sure that would protect them."

  • Defendants' assessments of litigation risk, especially if they are conservative (i.e., on the high side) to fend off shareholder lawyers, will tend to depress their stock and increase their cost of raising capital. In turn, companies will have a new reason to fold and pay a high settlement in order to get an even higher contingent liability off the books.

The story quotes veteran Northern California plaintiff's lawyer Joseph Cotchett as thinking the accounting change is a great idea, which is like having your picnic location endorsed by the ants.

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