Monday, February 9, 2009

FASB to Resume Deliberations on Liability Disclosure

  • FASB needs more investor commentators.
  • FASB seeks companies to model good financial statement disclosure.
You may recall that last summer, when Wall Street was only just beginning its current meltdown, the Financial Accounting Standards Board solicited comments on a new proposal to expand its liability disclosure standards. The proposal would require companies to report more about known and potential liabilities in their financial statements.

FASB received dozens of letters from investors and advisors urging the Board to go forward with disclosure improvements. But it also received letters from hundreds of companies and their lawyers opposing the proposal -- asserting that disclosure of future liabilities is too speculative and that it would would undermine attorney client privilege.

Originally slated for implementation in December 2008, FASB postponed the effective date until at least December 2009. The Board asked FASB staff to conduct “field experiments” to demonstrate models of possible disclosure:

"The staff will develop an alternative model for disclosure requirements that will attempt to address concerns raised by certain constituents about the proposed requirements in the Exposure Draft. The staff will then conduct field testing of both the model in the Exposure Draft and the alternative model. Field testing is expected to take place in November and December 2008…

After field testing is completed, the FASB will hold public roundtable discussions. Those discussions are expected to take place in the first quarter of 2009."

According to FASB staffer David Elsbree, only three companies came forward to volunteer to field test options for disclosure. The companies agreed to actually prepare financial statements consistent with the original proposal, as well as an alternative model based more on factual disclosure and less on speculative judgment calls about potential liability. The theory is that the alternative model might avoid most of the problems that corporate lawyers asserted would breach attorney-client privilege or work product. The alternative model could involve disclosure of factual information sufficient to allow third parties to begin to develop informed estimates of potential liability exposures, without requiring the companies to advance speculative estimations of liability themselves. Apparently there are only a few limited examples of this approach in the model suggested to the field testing companies.

The staff at the FASB is still awaiting results from the three volunteer companies, who are conducting the field trial on a confidential basis.

On March 6, FASB plans to hold a roundtable to discuss the results of the field tests, and seek constructive dialogue among stakeholders as to how to refine the prior proposal into something more workable for all concerned.

As I noted in my prior blog post I believe there is room for refining the prior proposal to better meet investors’ information needs while protecting privileged information.

Action Steps for Interested Investors:

• The participants in the pending FASB roundtable have not yet been selected . There are far more representatives of corporate law firms and corporate filers who have volunteered to be in the roundtable than users of financial statements. ( Full disclosure: I am on the short list of potential roundtable participants from the investors’ perspective.) Interested investors can contact FASB within the next few days and request to be added to the list of possible March 6 roundtable participants. (Or contact me to discuss this further.)

• FASB needs to find additional companies who could model ( either on a public or confidential basis) what a good model of disclosure would look like. Do any candidates come to mind among the companies in your portfolio?

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