Nine out of 10 Commenters Agree: FASB Proposal Not So Good

By August 12, 2008Briefly Legal, Economy

Another batch of comment letters came into the Financial Accounting Standards Board about FASB’s proposal, “Disclosure of Certain Loss Contingencies–an amendment of FASB Statements No. 5 and 141(R),” up to 217 as of this afternoon. (Comment deadline was Friday.) This is proposed change to accounting rules that would require companies to report contingent liabilities resulting from litigation. FASB’s intentions are understandable and the goal of increased transparency is certainly not malign: There’s a lot of litigation out there that can affect the bottom line and it’s reasonable for investors to have insight into the possible effects of these lawsuits.

But, really, is the public served by a company’s speculation about what cash-seeking trial lawyers might or might not accomplish with their litigation against the business? The overwhelming majority of the submissions — certainly above 90 percent, we estimate — oppose FASB’s proposal. As the NAM’s comment letter said, “We believe the proposed standard would lead to less accurate and less useful information for investors, threatening the attorney-client privilege and the attorney work product doctrine, unnecessarily provide information to potential claimants, and force corporate defendants to disclose privileged information to plaintiffs thereby jeopardizing their ability to defend the litigation.”

Today’s WSJ Law Blog notes the opposition from the pharmaceutical industry, noting the instructive case of the circuitous, extended, serpantine, confusing, ultimately questionable but still expensive Vioxx litigation. (That’s our description.) The Law Blog uses “torturous,” always a good term when discussing torts:

Remember the long and torturous road of the Vioxx litigation? A $4.85 billion settlement. Then multi-million dollar jury verdicts in Texas and New Jersey, some of which were reduced under state damage caps before being tossed aside completely on appeal in the spring.

The point we’re trying to make here is that, for Merck, the Vioxx litigation took the company down several unpredictable roads. So it’s perhaps somewhat understandable that Merck, along with five of its drug industry competitors, are a bit peeved over a proposed accounting rule that would require companies to disclose estimated costs of all continuing litigation. …[snip]

In a joint letter from Merck, Pfizer, Eli Lilly, J&J, Novartis and Wyeth, the companies told FASB that that estimating the costs of continuing litigation is “highly subjective, subject to huge swings as underlying assumptions change, and unlikely to provide financial statement users with meaningful or reliable information.” Others, including GE, DuPont, Boeing and McDonalds, have also objected to the rule. Click here for a WSJ editorial from last week on the proposed rule.

For more, including the views of the “socially aware” investors who want even MORE speculative reporting, see this Point of post.


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