Abstract: Report from Financial Accounting Standards Board 3/6/09 Roundtable on Contingent Liability Disclosure (FAS 5) • Convergence of opinion on several points, such as needs to avoid requiring “prejudicial” disclosures, and the need to mandate disclosure of severe risks even if viewed by management as “remote” and “long term.” • Questions for investors: How much of a priority is it for FASB to: (a) Require companies to seek and disclose third party liability estimates in lieu of disclosure of their attorneys' projections? When should this be required? (b) Require disclosure of severe “remote” risks, such as science showing nanotech hazards that could amount to the "next asbestos"?
• Existing disclosures are inadequate to sufficiently inform investors. (Generally agreed to by financial statement users, but not necessarily agreed to by representatives of the filers or defense bar.)
• There was general agreement from financial statement users with the idea that if a liability is viewed by a company as “remote” but the consequences could be severe, then disclosure should be required regardless of the timeline on which the liability would be resolved. Furthermore, it was also the general sense that the more remote a liability is viewed, and the longer time it may take to resolve, the less detailed the disclosure obligation might be. (The issue of reporting of potentially severe long-term liabilities even if viewed as remote by the management had been a major issue raised by the Investor Environmental Health Network, and it was gratifying to hear something of a consensus forming among investors on the need to address this.)
• In improving contingent liability disclosures, the FASB will need to strike a balance between providing better information to investors, while not requiring disclosure of information that would prejudice cases being defended by companies, and therefore might actually lead to an increase in the costs of those liabilities. Examples of problematic disclosures could include (a) predictions of total liability or probability of success as determined by a company’s own lawyers, especially when disclosed separately on the individual case (b) settlement offers and projections of the timing for a settlement.
• Examples of information that would not fall into this “prejudicial” category might include: (a) descriptions of the contentions made in a case; (b) public documents such as public court filings that show in more detail the contentions in the case; (c) Links to those public documents. The financial statement filers and defense bar representatives at the meeting suggested that the best solution is to provide shareholders with access to those contentions and public documents, and for investors to then do their own assessment as to the level of potential liability. It was suggested that the largest investors would be able to do their own assessment of the liability using those public documents. I raised the question about where that leaves smaller investors, and the added cost and inefficiencies posed to the broader investing community if everybody has to do their own assessments of the magnitude of these liabilities.
DOW “DISCOVERS” $2.2 BILLION IN ASBESTOS LIABILITIES
Dow Chemical did not report any asbestos liabilities when it acquired Union Carbide in 2001. But two years later, Dow reported a $2.2 billion asbestos liability associated with the acquisition, a figure arrived at by finally looking at comparable lawsuit outcomes at other companies.
MAXXAM/KAISER IGNORES JOHNS MANSVILLE’S EXPERIENCE
Kaiser Aluminum, a subsidiary of Maxxam Corporation, underestimated its asbestos liabilities in the mid-1990’s. A few years later Kaiser was driven into bankruptcy, in part because the spiraling asbestos litigation costs finally caught up with them.
In its 10-K report for 1995, Kaiser estimated that future cash payments in connection with asbestos litigation would be …an aggregate of approximately $78 million thereafter through 2008. The company noted there was no reasonable basis for estimating such costs beyond 2008. One could have predicted much greater asbestos liability, however, by comparing the amount per case that Kaiser was using to calculate its liabilities against the much greater amounts that were being paid out per case by other comparable companies in the course of their asbestos settlements. For example, asbestos cases against the Johns Manville trust had, by 1990, paid an average of$43,500 each on the first 24,000 claims. Maxxam, by contrast, had accrued only $160 million for 59.7 thousand cases pending in its 1995 10-K. If Kaiser had multiplied the 60,000 cases by the average Johns Mansville settlement figure of $43,500, they would have calculated a total potential loss of $2.5 billion... By 2002 … Kaiser and 24 subsidiaries filed for bankruptcy [ citing mounting asbestos liabilities among other issues ].
Despite early warnings about the effects of asbestos on health, it took 100 years to introduce internationally accepted asbestos standards. The chronic danger of exposure to nanoparticles could similarly take time before it manifests itself. Multiple laboratories have already independently reported that carbon nanotubes cause progressive, irreversible lung damage in test rodents. As noted above, this may be because carbon nanotubes are similar in form and size to asbestos fibers. Product liability may also arise from other similarities between nanotechnology and asbestos, such as their worldwide dissemination and wide range of uses. Carbon nanotubes already have a variety of uses, from tennis rackets and bicycles, to displays and TV screens, and a variety of resins used by aerospace, defense, health care, and electronics companies.
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In the absence of long-term toxicological studies, it is difficult to determine the degree of risk posed by the presence of nanoparticles in the body or environment. However, risk assessors are focusing on these questions, and recognize the extreme complexity of the problem. According to [a report by reinsurer] Swiss Re: …an inattention to nano-specific risk research puts more than consumers and the environment in danger. It sets up a scenario in which the future promise of nanotechnology in such fields as robotics, medical technology, and computer science could suffer serious setbacks, when predictable and preventable problems emerge as market-jarring surprises. It is very likely that a cause and effect relationship will be established between nanoparticles and human health effects, because these particles have historically unprecedented access to the human body. Swiss Re also points out that ”these artificially manufactured nanoparticles will be traceable back to the manufacturer, which makes the establishment of liability easier than in the case of substances that are universally present, such as ultrafine particles from diesel exhaust fumes.”
(a) Encouraging the FASB to require companies to undertake and disclose estimates of liabilities through third parties (so that a company’s own lawyers’ opinions remain privileged)? If so, under what circumstances should such estimates be mandatory?
(b) Ensuring FASB requirements for disclosure of remote long-term potentially severe issues such as unasserted claims regarding nanotechnology liability risks?
Looking forward to our continuing discussion of these timely and important questions.