FASB Calls for Guesstimating Ongoing Litigation Costs

The comment period for a Financial Accounting Standards Board (FASB) proposal that would require companies to account for the potential cost of ongoing litigation came to a close last week on the heels of a Wall Street Journal editorial that lambasts the notion that the change would be a benefit to shareholders.

The proposed change, a revision to FAS 5, would require that companies list on its financial statements its best guess of a lawsuit's final litigation costs in attorney fees and any potential payouts. "For a company in high stakes litigation, that means showing its hand to plaintiffs' attorneys...The effect will be to force corporate defendants to fight lawsuits with one hand tied behind their backs--assuming the company can even figure the 'fair value' of a lawsuit it has no idea if it will win or lose. Predicting the trajectory of complex, often multiyear litigation is inherently unscientific," the Journal's op-ed writers contend, adding that faulty guesswork could increase the risk of more lawsuits.

Criticisms of the proposed change from companies that believe it stretches the boundaries of fair value accounting beyond the breaking point have been rolling in. In a comment letter to the FASB, 13 large companies argue that lawsuits filed for publicity purposes or to pressure a business are often dropped and that trying to estimate the fair value of liabilities from the get-go "would be both flawed and misleading."

The Committee on Corporate Reporting and Government Business of the Financial Executives International (FEI) stated in a letter to the FASB that it believes the disclosures will not be meaningful given the complex nature of such contingencies and their inherent unpredictablilty.

Why is the FASB proposing this change now, when there's been no outcry over the adequacy of current rules that put a number on the potential cost of a lawsuit when the defendant believes it will probably lose the case? The editorial suggests that the overzealous FASB members are forgetting that accounting issues aren't always black and white -- and that measuring amorphous concepts doesn't necessarily translate into benefits for investors.