A proposed new accounting rule has stirred fierce debate over whether companies should disclose estimates of the potential losses they face from lawsuits.
But responses to the controversial proposal from the Financial Accounting Standards Board have also raised a much broader question: Should FASB even write new accounting rules anymore?
Many of the companies submitting comments said no, arguing that the widely expected switch from U.S. Generally Accepted Accounting Principles to International Financial Reporting Standards means FASB should no longer unilaterally issue accounting rules.
“Help us transition to IFRS rather than creating new rules that may be obsolete in the near future,” wrote Douglas Shuma, chief accounting officer and controller of Telephone and Data Systems Inc., in a comment letter.
FASB’s proposal to amend FAS 5, Accounting for Contingencies, would require companies to disclose “specific quantitative and qualitative information” about loss contingencies — particularly from lawsuits — and to estimate their possible maximum loss. Further departing from current practice, companies would have to disclose even “remote” possibilities of loss if the cases were expected to be resolved within a year. While most of the 226 responses focused on the often-inflated claims of plaintiffs, the inherent unpredictability of litigation, and fears of giving plaintiffs’ attorneys too much information, some comment letters also pointed out that the proposed new rule diverges from the existing international equivalent, known as IAS 37.
“As convergence is likely inevitable and near term, we believe issuance of new guidance prior to agreement between the Board and the International Accounting Standards Board should be deferred,” wrote Douglas K. Bradford, controller of Ball Corp.
“[W]e believe that implementing the proposed statement prior to completely harmonizing international accounting standards…could have a material adverse effect on the U.S. capital markets,” wrote John L. Merino, principal accounting officer of FedEx. Added Thomas W. Sweet, chief accounting officer of Dell, “The current direction of the Board is to converge with IFRS and focus on principle-based standards. We do not believe this proposal is within the spirit of that goal.”
Of course, any transition from U.S. GAAP to IFRS is still years away — the Securities and Exchange Commission has yet to say for certain that it will happen at all, and the most commonly predicted year for a U.S. transition is 2013. “It is very important, it’s necessary, that we continue to maintain U.S. GAAP,” FASB board member George Batavick said in a webcast in June.
Still, FASB has made no secret of its plan eventually to hand its job over to the International Accounting Standards Board. In that same webcast, Batavick described how FASB has dramatically narrowed its agenda, paring down projects seen as essential to U.S.-international convergence so that some of the largest differences between U.S. GAAP and IFRS can be eliminated by 2011 at the latest. FASB has also downsized from seven members to five, even as IASB, at 14 members, plans to increase its membership to 16. It is perhaps no surprise, therefore, that companies are beginning to object to any controversial standards that FASB attempts to implement on its own.