Cal Biz Lit

FSAB Disclosure Proposal: Back To The Drawing Board

Cal Biz Lit, and a bunch of other bloggers and commentators, spilled a fair amount of ink (or 1's and 0's, as it were) on the Financial Accounting Standard's Board's highly unfortunate proposal to revise the reporting standards for loss contingencies -- i.e., amounts that might or might not be claimed, and might or might not be recovered, in litigation.  CBL's previous posts are here, here and (my favorite) here.   

FASB received more than 350 comment letters, and guess what? As far as we can tell, nobody said "Hey, FASB, way to go!"  In fact, it looks as though the comments were variations on "Are you out of your freakin' mind?"

Monday, FASB announced that it was backing off.  The new standard won't go into effect for 2010.  Instead, "the Board will redeliberate and make changes as appropriate."  And "It will decide on an effective date at a future meeting, after it has substantially concluded its redeliberations."

How about, never?  Just a thought. 

 

FASB Revisions: A Model of Concise Comment

    We've blogged twice (here and here) about the Financial Accounting Standards Board's efforts to trash Standard 5 and destroy the attorney client and work product privileges, er, I mean to update and revise the standards for disclosing loss contingencies in the Draft Exposure Guidelines.  And I've been sweating away on my comment to the Board, now that Comments are open until September 20.

    But my new hero is James Blaine, President of  the North Carolina State Employees' Credit Union in Raleigh. Mr. Blaine has commented, not on Topic 450, but on another no-doubt well-intentioned revision, this one to the "Mark to Market " standards in Topics 815 and 825.  Mr. Blaine's comment could easily apply to the Topic 450 revisions as well.  The comment, in its entirety:

Dear Sirs:

    Theoretically arrogant;  in practice insane;  financially negligent and reckless.

    Other than that, I have no concerns.

                                                                                 Sincerely,  James C. Blaine

Hat tip, James E. Nye (author of A Taxing Blog).

FASB Extends Comment Period For Proposed Disclosure Rules

    It seemed as though about half the fifty letters written so far to the Financial Accounting  Standards Board on its proposed revision to corporate contingency disclosure standards were requests to extend the comment period.  Given the complexity of the new rules and their importance to companies, their law departments and their outside counsel, thirty days in the middle of summer seemed pretty ridiculous.

    So the FASB has indeed extended the deadline, and will accept comments through September 30, 2010. 

    Among those who have commented substantively, eloquently and in detail are the U.S. Chamber of Commerce and the Association of Corporate Counsel.  And guess what?  They don't like the proposal one bit.

    More (actually, lots more) on this issue in the Cal Biz LIt post from August 9.

New FASB Disclosure Proposal: Not Helpful. Not Helpful At All.

    As best I can tell, most Cal Biz Lit readers are lawyers, and most of them are involved in some way in the litigation world.  So here's a hypothetical for everyone:

    Suppose at the end of every fiscal year, clients wrote a letter to their outside counsel as follows:

Dear counsel:

    Please prepare a letter about the large cases you are defending for our company, honestly and completely explaining:

• What are our risks in cases where we re being sued?  Do you think we are going to win or lose?  If we lose, how bad is it likely to be?
• When do you think you will settle the case?
• Include an evaluation of any cases where you are sure we will win and not owe anything, but if you're wrong and the wheels fall off, the verdict will have a "severe impact" on our company.  And then write about any cases where you're sure we're going to win, but defending the case is going to be really expensive and disruptive -- we want your evaluation of those cases, too.

    An when you're done writing all this down, we're going to put it up on the internet where the other side can read all of your thoughts about these cases. 

    After you've shown all your cards, good luck defending the cases.  Don't let us get into trouble.  And have a nice day.

                                                                                            Sincerely,

                                                                                                                Client

    Pretty wacky hypothetical, huh?  Pretty far out?  But in effect, that's what the Financial Accounting Standards Board of the Financial Accounting Foundation may be getting ready to require with its "Proposed Accounting Standards Update, Disclosure of Certain Loss Contingencies."

    This is going to be a longer and more arcane post than the usual CBL musing.  So for those readers who don't have time to read all of this because, for example, they have jobs, here are the key points:

• The FASB issued its unfortunate "Exposure Draft" on July 20, with a comment period of less than thirty days.  The comment period ends August 20.  Comments need to be sent to the Financial Accounting Standard Board's director at [email protected], File Reference No. 1840-100.  Comments -- lots of them -- would be a very good idea.
• The new standard, if adopted, will supplant the 35-year-old Statement of Financial Accounting Standards No. 5 in governing requests for audit information to lawyers.  More importantly, it may supplant the 1975 "Treaty" between the American Bar Association and the American Institute of Certified Public Accountants, more formally known as the "Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information."  The "Treaty" helped to ensure that lawyers' responses to audit requests did not result in a waiver of the attorney-client privilege and work product doctrine.
• The new standard contains none of the protections of the Treaty, and requires companies to ask lawyers to provide information to non-clients -- independent accounting firms -- that in many instances cannot be provided without breaching the attorney-client and work-product privileges.
• Under California law, and the law of many states, a voluntary disclosure of privileged matters constitutes a waiver of the privilege, exposing the previously protected matters to discovery by an adverse party.
• The proposal's requirements related to "maximum exposure" and plaintiff's demands will require the disclosure of misleading information and/or result in no useful information for investors or other users of financial statements.
• Similarly, the requirement that contingencies be disclosed without regard to insurance coverage will also result in misleading information in those instances where the availability of liability insurance mitigates the impact of otherwise large exposures.
• The aggregation provisions help prevent prejudice in some cases, but they do nothing about the wavier problem and are of not help to a small company with a big lawsuit. 

    Those are the essentials.  For readers who want to get deeper in the weeds, there's much more after the jump.