FEI Comments On FAS 5 Proposal On Contingencies
August 8, 2008

FEI Summary

(Aug. 8, 2008) In comment letters filed today, FEI technical committees voiced concern about the Financial Accounting Standards Board’s proposal to change disclosures on contingencies, including litigation contingencies, contained in FASB’s Exposure Draft, Disclosure of Certain Loss Contingencies – an amendment of FASB Statements No. 5 and 141(R).

As noted in a cover letter signed by Christine DiFabio, vice president, Technical Activities at FEI, the following letters were included in FEI’s comment letters on FAS 5:

·         A joint letter of FEI’s Committee on Corporate Reporting (CCR) and Committee on Government Business (CGB); and

·         A letter from FEI’s Committee on Private Companies (CPC)

The joint letter submitted by FEI’s Committee on Corporate Reporting (CCR) and Committee on Government Business (CGB), signed by CCR Chair Arnold Hanish and CGB Chair Dale Wallis, notes, “CCR and CGB (“the committees”) are very concerned about the implications the ED will have, if finalized in or near its present form, on the accounting and disclosures of loss contingencies related to litigation; particularly the prejudicial effects these changes will have on ongoing and threatened litigation.”

CCR-CGB adds, “It is our experience that very frequently, probably more often than the board realizes, litigation losses are not reasonably estimable, until a conscious decision is made by both parties to settle. Our experience also indicates that once the decision is made to seriously attempt a settlement, that events move quickly and meaningful monetary amounts are only then discussed. This is obviously at the very end of the process and frequently years after the litigation process begins.” Further, they note: “The litigious environment in the United States is much more active than in most of the rest of the world and, consequently, we believe analogy to other environments (and by extension to IAS 37) is not an appropriate comparison. We do not believe companies can comply with the letter and spirit of the ED without possibly compromising or waiving fundamental rights embodied in U.S. law. With respect to non-litigation-based contingent liabilities we are not convinced as to the need for a new standard in this regard because of substantial pre-existing disclosure requirements in current standards.  In conclusion, we strongly recommend to the board that the ED not be finalized.”

The high level of concern regarding FASB’s proposal to change contingency disclosures is evident in the fact that financial executives representing 31 member companies signed onto the CCR-CGB letter, as shown on Exhibit I to the letter.

The separate letter filed by FEI’s Committee on Private Companies (CPC) was signed by William Koch, chair of CPC’s Standards Subcommittee. The CPC letter states, “The constituency requesting increased disclosure of loss contingencies is driven by investment analysts and others, who are attempting to value public companies and compare one public company to another for investment purposes. This is not the case for private companies, as many private companies are not evaluated in the same manner as public ones. Some private companies’ stocks are not valued; others are based on formulas relating to business metrics including book value, net worth, etc.”

The CPC letter adds: “For private companies, we believe that any incremental increase in compliance costs will outweigh the benefit to users of the proposed additional disclosures. FASB staff suggests that there is a weakness in existing disclosures of contingencies. We do not believe that the dissatisfaction is a direct result of a weak standard. …. If the existing standards were consistently applied and audited with existing audit standards, we believe contingency disclosures would prove adequate for all general purpose financial statement users. Creating additional rules will not improve compliance with existing standards, but will degrade the importance of one of the most prominent principles-based standards.”

Additional comment letters received by FASB are being posted here.  (Note: as of 2:00 pm Aug. 8, the listing of comment letters posted by FASB currently includes 69 comment letters received as of Aug. 7, 2008, FASB is in process of posting additional letters received.)