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FASB Says Adios To Loss Contingencies Project

At its board meeting yesterday, the FASB board voted to drop its loss contingencies project. In extensive coverage of the actual discussion at yesterday's board meeting, Bloomberg/BNA reporter Denise Lugo wrote in her article, FASB Drops Loss Contingencies Project; Says Enforcement Actions Should Suffice:

[FASB]...voted 5-2 on July 9 to remove from its agenda a project aimed at improving disclosures about loss contingencies, stating that further progress should be handled through enforcement actions as opposed to additional standard-setting efforts.

FASB members in general agreed with a staff member's summary “that it is not the board's duty to enforce the guidance that it provides.

As we noted in our blog post in advance of FASB's meeting, the legal community, including the American Bar Association and the Association of Corporate Counsel, opposed FASB's original proposal (Exposure Draft), as well as FASB's revised Exposure Draft. 

Bloomberg/BNA's Lugo continues:

FASB added the project on disclosures of loss contingencies with the purpose of expanding the disclosures already required in Topic 450 to assist users in assessing the likelihood, timing, and amount of future cash flows associated with loss contingencies.

Two exposure drafts issued in June 2008 and subsequently in July and September 2010 received overwhelming opposition, particularly from legal entities, because the proposed disclosures were too expansive (219 DTR G-4, 11/16/10; 159 DTR G-2, 8/19/10).

Such entities were concerned that aspects of the proposals would inevitably provide prejudicial information to complainants and thus handicap preparers in potential settlement matters.

Linsmeier, Siegel Dissent

According to this memo by law firm Gibson Dunn, cited by Broc Romanek in TheCorporateCounsel.net Blog, the two dissenting FASB members were board members Tom Linsemeier and Marc Siegel

The Gibson Dunn memo noted [items in brackets were added by me for clarification]:

The majority [of the FASB board] agreed that the current requirements under Accounting Standards Codification Topic 450 [including FAS 5] are sufficient and that addressing any concerns with the adequacy of loss contingency disclosures is an issue of compliance and enforcement rather than standard-setting. Board members Linsmeier and Siegel dissented, with each noting that the project should continue with a focus on providing additional guidance on qualitative disclosures about loss contingencies. 

Disclosure Framework Proposal Coming Soon
Gibson Dunn also notes that FASB Chairman Leslie Seidman stated that some of the concerns about disclosure of loss contingencies would be addressed in FASB's upcoming release of its proposed Disclosure Framework, which, according to Gibson Dunn, Seidman indicated was expected to be released  for public comment "in late July."

SEC 'Dear CFO' Letter Still in Effect
A summary of FASB's decision released last night by by PwC, entitled In brief: FASB votes to discontinue loss contingencies project reminds readers that:

In late 2010, the SEC gave a series of speeches and issued a "Dear CFO" letter, which put constituents on notice that the SEC would be focusing on the disclosure of loss contingencies. 

Here is the SEC's Oct. 2010 'Dear CFO' letter, and our related blog post at that time. Note: what is informally referred to as an SEC 'Dear CFO' letter, is basically a letter sent by the SEC to all public companies, asking that they consider or provide particular types of disclosures. Such a letter, with such a wide distribution, for all intents and purposes becomes quasi-regulation, as the SEC in effect expects such disclosures from all registrants unless otherwise noted. 

Is there a Musical Theme to this FASB Decision?

As some of our long-time email subscribers and twitter followers know, I like to tie musical themes (and sometimes am inspired to write some) with respect to various FASB, IASB, SEC and PCAOB actions.  

In this particular case, I found a couple of songs from different generations, both called "It's Over." The first one, has an opening line which I think is highly relevant (read the Bloomberg/BNA article or listen to the webcast/podcast of the 6/20/12 FASB Ed session or yesterday's FASB board meeting, particularly comments by FASB board member Daryl Buck as to the practicality of continuing this project, given the amount of opposition  from most constituents, and the other major projects on FASB's agenda).

Here is the first line from Jessie McCartney's It's Over:  

We've run out of words we've run out of time, We've run out of reasons really why… 

And although for the most part the lyrics in an older tune aren't as relevant as the above opening line, there's only one person who can sing a closing line like this one, in Elvis Presley's "It’s Over.“

Footnote: sometimes, it aint even over, after it's over, as we've seen with FASB's Going Concern project, which was on FASB's agenda, off the agenda, and is now back on, as we previously reported. But in this case, with respect to loss contingencies, and litigation contingencies in particular, I personally (please see the disclaimer on the right side of this blog) think this particular project is indeed over, especially pending what we see in the Disclosure Framework proposal due out later this month, as noted above. 
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Posted: 7/10/2012 4:22:57 PM by Edith Orenstein | with 1 comments
Filed under: FASB Drops Loss Contingencies Project,loss contingencies,litigation,FASB


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Comments
Frank Minter
I have long believed that SFAS 5 is one of the best standards ever issued by the FASB. It is based on principle and requires judgement in its application. As a practical matter any CFO who quantifies a potential legal settlement has reported the minimum liability.
7/13/2012 3:43:49 AM

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Edith Orenstein