During early stages of asserted litigation contingencies, disclosure shall include, at a minimum, the contentions of the parties (for example, the basis for the claim and the amount of damages claimed by the plaintiff and the basis for the entity's defense or a statement that the entity has not yet formulated its defense).
Accounting & Auditing FASB Tries Again on Disclosure of Contingencies By Tammy Whitehouse almost all were negative. “To say it was more in favor of publicly available infor- not well received would be an understate- mation, he says, which should help allay A ccounting rulemakers are poised to propose a new method for how com- panies disclose the possible cost of law- ment,” says Chuck Evans, a partner with Grant Thornton. At the time, companies and audit concerns over attorney-client privilege and exposing legal strategy. Greg Rogers, an environmental lawyer suits—but rest easy, companies will have firms alike said FASB’s approach would with the law firm Guida, Slavich & Flores, ample time to express their thoughts on trample attorney-client privilege and says the new proposal more closely re- the always controversial subject. compromise a company’s ability to de- flects a long-standing agreement between The Financial Accounting Standards fend itself by forcing it to disclose legal the legal and audit professions regarding Board is putting the finishing touches strategies or arguments. Lawyers railed what information auditors can see to back on its proposal, which would update Ac- that required disclosures, with ranges of up assertions in financial statements. The counting Standards Codification Topic possible dollar-figure outcomes, would American Bar Association and the Amer- 450, Contingencies. Those contingencies be speculative at best and used by legal ican Institute of Certified Public Accoun- could be any number of issues where a adversaries as benchmarks for extracting tants inked that policy statement in the company might face some liability or gain a settlement. mid-1970s, but FASB’s original proposal in the future, but lawsuits have emerged Investors, on the other hand, generally seemed to set it aside, he says. as the most sensitive one: Investors want loved the idea; they called for even more “The heart of the issue is whether the more advanced warning about their pos- disclosure of the most remote loss con- Big 4 can audit this or not,” Rogers says. sible costs, while companies worry such tingencies that could have a severe effect If attorneys won’t provide evidence for disclosure might tip their hands to op- on the company. FASB went back to the the sort of predictive disclosures FASB posing litigants. drawing board. originally demanded, auditors can’t give The current methods for accounting Now FASB plans to issue an exposure a sound opinion on those disclosures. for contingencies have been around for draft of a new proposal sometime this “That was an oversight in the whole stan- decades; ASC 450 traces its roots to Fi- spring. This one generally steers clear of dard development process,” he says. nancial Accounting Standard No. 5, Ac- predictive disclosures, but does require The new standard’s disclosures would counting for Contingencies, which was more disclosure of more remote contin- not rely on legal analysis that might be adopted in 1975. Investors have com- gencies, Evans says. He described the new protected by attorney-client privilege, plained, however, that the current rules model as “more factual, trying to deal with Rogers says: “Auditors don’t have to look don’t give enough warning that a looming pure facts as opposed to predictions.” to lawyers to verify publicly available in- liability might be large, says Peter Bible, a Companies would start by disclos- formation.” partner at auditing firm Amper Politziner ing whatever limited information they Still, there’s likely to be some grum- & Mattia. Aside from lawsuits, contin- may have even on an early-stage contin- bling about the new standard, warns gency bombshells also come in the form gency, and then provide more detail in Michael Scanlon, a partner at law firm of environmental cleanup costs, warranty subsequent periods as it becomes avail- Gibson, Dunn & Crutcher. He says com- obligations, collection of receivables, and able. They would also be allowed to make panies and their legal counsel might no
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