FASB Proposes Controversial Accounting Standard

September 1, 2008

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Foundations have been shaken throughout corporate America with the Federal Accounting Standards Board’s (FASB) June 5, 2008 release of an exposure draft proposal entitled Disclosure of Certain Loss Contingencies: An Amendment of FASB Statements No. 5 and 141(R), according to Jon Walker, Director Corporate, Legal and Government Services at Environmental Data Resources.

The proposed accounting standard seeks to modify the rules currently governing loss contingencies, including the disclosure of the costs of ongoing environmental litigation and pending unsettled lawsuits. With the proposed standard set to change the number of loss contingencies that a company must disclose, many corporate giants, including several pharmaceutical companies, have raised strong objections to the amendment.

FASB responded by saying that the changes have come at the behest of investors, many of who have taken issue in the past with companies’ disclosure procedures. The notion that companies fail to properly disclose pending litigation or other liabilities to their investors, including environmental liabilities, has long been an issue championed by investors, Walker says. The new amendment reflects the growing pressure that large investors are placing on FASB to force companies to come clean about their liabilities in the name of increasing transparency.

With the public comment period closed as of early August 2008, a determination will now be made as to whether the FASB proposal remains intact, or if changes are imminent. If the rule remains unchanged, it
will become effective for annual financial statements issued for fiscal years ending after December 15, 2008.

It is clear that the rules are changing for estimating and disclosing environmental liabilities, according to Walker, who encourages companies directly or indirectly involved in the recognition, measurement, and disclosure of environmental liabilities to have their ear to the ground on the progress of this proposed standard.

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