Thecorporatecounsel.net’s blog highlighted lawyers’ extensive concerns over proposed disclosure revisions to FAS 5. An ABA letter is referenced and it’s quite long in its dialog. Having reviewed the same exposure draft and recognized the law community would likely trip on the provision relating to quantification of litigation, it’s a good time to look at it.

From legal’s pov, the less said publicly about active, pending or threatened litigation the better, and outright quantification is mad. It’s publishing critical pages of the playbook, which puts the company at a disadvantage and could put substantial shareholder value at risk. More work and fees are a given and events like bankruptcy can be worst outcomes. True.

The shareholder bears those same risks, no matter the outcome for FAS 5. Market values can also stall and decouple from operational performance during litigation involving material sums and the shareholder eventually pays for all costs of litigation, whether judgment, settlement or fees, through discounted market value. Investors need enough information for accurate risk assessments, with at least meaningful ranges quantified, when that disclosure doesn’t put similar amounts of enterprise value at the same or greater risk.

The proposed amendment to FAS 5 recognizes these are competing interests between the enterprise and shareholder, regarding breadth of litigation discussion, particularly on quantification. It navigates these shallows with an exemption from providing “prejudicial information”. Disclosure of such information is defined as something that could affect the legal contingency’s outcome, to the detriment of the company & its shareholders.

As the exemption is proposed, it would allow for quantification of the legal contingency disclosed at a “higher level” than itself. This generally means the estimated loss can be disclosed in a broader category with other contingencies, rather than by itself, effectively abating the prejudicial risk to its outcome.

In “rare” cases where commingling it into a broader contingency valuation will not do the trick for abatement of the prejudice (such as when it’s the only contingency), the prejudicial disclosure can be omitted. However, the exemption emphasizes a narrow interpretation that provides only for omission of information determined prejudicial, along with a statement saying this and the reasons why. “Rare” is reasonably defined as being a facts & circumstances evaluation (the amendment must allow practice to shape this).

The proposed amendment goes further in re-enforcing that disclosure of the claim or estimate of the maximum loss remains mandatory, as well as a full discussion of its facts and legal foundation.

The ABA letter goes through exhaustive analyses and provides a few recommendations for the FASB (everybody has some). The principal ones ask for empirical evidence demonstrating how the new disclosures would improve what’s currently being disclosed under FAS 5, as is.

The prejudicial information exemption is a capable decision tool for improving the current disclosure standard for litigation contingencies. Some chiseling of the proposed amendment will be helpful, for the kinds of reasons the ABA illustrates in its letter (complexity and operation of US legal system and unique facts & circumstances of each case in the system).

When those edits are married with practice level experiences, they’ll be able to forge a valuable new working policy for improved disclosure of risk to shareholder value from litigation contingencies.