FASB Backs Off on Its Litigation-Inviting Disclosure Proposal

The Financial Accounting Standards Board (FASB) has again called a halt to its plans to require corporations to disclose “certain loss contingencies” on its book, a proposal that would have increased speculative litigation against companies without adding any information of real value to investors.

A summary of the board’s Oct. 27 meeting reports:

The July 2010 Exposure Draft, Contingencies (Topic 450): Disclosure of Certain Loss Contingencies, had proposed that public entities would begin providing enhanced disclosures in financial statements for fiscal years ending after December 15, 2010. The Board decided that a final standard will not be effective for the 2010 calendar year-end reporting period. It will decide on an effective date at a future meeting, after it has substantially concluded its redeliberations.

This is the second time that an outpouring of commentary (350+ comment letters!) and criticism from companies, the legal profession and investors has forced FASB to re-evaluate its plan. As the comment letter from the National Association of Manufacturers stated:

NAM members continue to believe that the proposed changes to rules on disclosing loss contingencies, if finalized, would have a negative impact on companies and would not improve the quality of financial reporting.

Consequently, NAM urges the FASB not to proceed with its proposed disclosure standard relating to loss contingencies. We are concerned that the proposed standard would lead to misleading and less useful information for investors, threaten the attorney-client privilege and the attorney work product doctrine and unnecessarily expose companies to additional litigation risk.

The interest of investors are not served by forcing companies to reveal their legal strategies or to introduce misleading, speculative and quite likely wrong information into their corporate disclosures. The only interests served are those of the trial lawyers and activists — environmental groups, Big Labor, and left-leaning “social investors” — who are more concerned with achieving their policy goals through litigation and PR pressure than in the success of the company and stockholders.

Or, as The Wall Street Journal summarized it,  “FASB’s Tort Bar Gift.”

Earlier posts. Hat tip: Cal Biz Lit, via Overlawyered.com

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