A Mark to Market Rule for Lawsuits?

The Financial Accounting Standards Board (FASB) has proposed a new standard for public disclosure of pending lawsuits. This raises interesting legal technology and management questions for general counsels.

Reporting Rights in the January 2009 issue of InsideCounsel reports on FASB Statements No. 5 and 141[R]. These now-delayed rules would lower

“the threshold for reporting the potential loss from a lawsuit from the current ‘probable’ to anything short of ‘remote.’ …. Currently, because many loss contingencies are reasonably possible rather than probable, companies usually deal with significant litigation by describing it and stating that an estimate of loss cannot be made. That’s a far cry from the detailed liturgy FASB’s original proposal mandated, a liturgy that critics say will not only fail to work as intended, but will prejudice companies in a variety of ways.”

It strikes me that you could view the proposed FASB standard as the moral equivalent of financial mark to market rules. Failure to mark financial assets to market contributed to the current economic crisis. If corporations now have to report more financial assets at market (rather than book) values, why not also the moral equivalent for lawsuits? I wish the article had analyzed whether the mark to market debate will affect the FASB rule-making.

For more see prismlegal.com.

FASB Delays Lawsuit Disclosures — The board responds to companies’ distaste for its proposed rule on contingent liabilities

Sarah Johnson – CFO.com

The Financial Accounting Standards Board has changed the deadline for when companies would have been required to provide new disclosures about their contingent liabilities under a controversial proposal.

Companies with a calendar fiscal year-end had been expected to comply with the rule in mid-December. At a board meeting today, FASB pushed off that date by another year after hearing that many companies could not implement a new policy for disclosing potential lawsuit liabilities in time. Plus, the board is still sifting through the wealth of feedback from lawyers, auditors, and financial statement preparers who worry the newly shared information would reveal confidential data and turn into an undeserved boon to the plaintiffs’ bar.

In the meantime, FASB will collect even more feedback by asking companies to do sample runs of its proposal along with an alternative method that has yet to be introduced. The rule overhauls FAS 5, Accounting for Contingencies — requiring companies to disclose “specific quantitative and qualitative information” about potential lawsuit liabilities — and changes the contingent losses that companies disclose under FAS 141(R), regarding mergers and acquisitions.