Tuesday, April 07, 2009

FAS 5 Update: Report On FASB Roundtable

We've posted before about the Financial Accounting Standard Board's proposal to revise how the accounting rules deal with loss contingencies, such as pending litigation.

The FASB held its roundtable regarding the proposal to revise FAS 5 on Friday, March 6. Although neither of your humble scribes attended that meeting, we've seen a report about that meeting. We sanitized that report slightly, and cribbed from it aggressively, to offer this description:

The Roundtable did not bog down into discussion of attorney-client privilege or prejudice to issuers that might arise from disclosing more details about pending litigation. FASB staff seemed to appreciate that the proposal called for disclosures that would be prejudicial. The roundtable participants discussed their views of good disclosure and less fulsome disclosures. Some noted that more fulsome disclosures are often made after courts have already ruled on key issues regarding liability in a lawsuit or the measure of damages. The more difficult disclosure issues are presented at an earlier stage of litigation.

There was also some discussion suggesting that the "problem" is not that FAS 5 is broken, but that there is either a lack of SEC guidance on appropriate disclosures relating to litigation, or lack of enforcement surrounding poor litigation disclosures -- or both. The SEC participated in the roundtable, although providing guidance about FAS 5 may not be at the top of the SEC's busy agenda these days. There was no indication that the FASB or its staff would defer to the SEC rather than adopting a rule change.

Several points seemed to garner the beginnings of consensus. At least one "user" of financial statements acknowledged that certain quantitative disclosures could be harmful to the preparer, and this acknowledgement was well received. There was also considerable discussion and seeming agreement among the accountants and the auditors that the disclosure of contentions of the parties to litigation, as opposed to predictions of outcomes, would help investors without unduly prejudicing the preparers. This led to a discussion of a "sliding scale" of disclosure based on the relative size, or risk, of the claims at issue as the litigation progresses toward a final outcome. It is not possible to predict with any precision what the next draft will include, but the apparent broad conceptual agreement on these points may shape the FASB's deliberations. Of course, the devil will be in the details.

FASB did not make any statements about the anticipated effective date of any final standard. The determination of an effective date is likely to be driven by the form and content of the revisions to the proposal. If the next draft that will be discussed at the FASB meetings in the next several months fairly closely follows the prior exposure draft but simply incorporates suggestions from commenters, then the FASB could theoretically adopt a new proposal to be effective this year. On the other hand: (1) If the principles mentioned above are incorporated into a substantially revised exposure draft, the FASB would be likely to "re-propose" the next draft for comment. (2) If the FASB's deliberations on the next draft continue into the late summer or early fall, there would be little time left in the year to consider related auditing standards and whether the ABA Treaty would need related revisions.

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