FASB Tries Again on Disclosure of Contingencies

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					 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
				
DOCUMENT INFO
Description: 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).
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