March 19, 2009

FASB Amends Guidance on Standard for Contingencies in Business Combinations

Last Friday, the FASB held a roundtable to discuss disclosure of certain loss contingencies. This handout shows the issues that were discussed, as the FASB is redeliberating last year’s proposed revisions to FAS 5 and FAS 141(R).

Among others, the issues in this redeliberation have implications for the “Treaty” between the ABA and the AICPA on lawyers’ responses to auditors’ requests for information on pending and threatened litigation and unasserted claims under FAS 5. Here are notes from the roundtable from Sanford Lewis. Any day now, it is expected that the FASB will issue a FASB Staff Position on FAS 141(R) on these issues in connection with business combinations since the FASB voted to do so at the end of February.

Below is a summary of what we can expect from Wilmer Hale:

In amending SFAS 141R, the FASB decided to “carry forward” the prior standard for recognition of contingencies under FASB Statement No. 141, Business Combinations (SFAS 141). Companies will now be required to recognize assets acquired and liabilities assumed in a business combination that arise from contingencies at fair value, if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would be recognized in accordance with FASB Statement No. 5, Accounting for Contingencies (SFAS 5), and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss. It is expected that most litigation contingencies assumed in an acquisition will be recognized only if a loss is probable and the amount of the loss can be reasonably estimated.

Last year, the FASB proposed the FSP in response to concerns about various provisions of SFAS 141R applicable to contingencies. Members of the legal community expressed concerns about the standards as they applied to litigation contingencies, in particular, the requirements that contingencies be recognized at their acquisition-date fair value if it was “more likely than not” that a loss had occurred. The FASB’s proposed FSP would have largely reinstated the prior standard for recognition under SFAS 141, but with amplifications and changes to other aspects of the standard. At its February meeting, the FASB decided to carry forward SFAS 141 without significant revision, thereby leaving many of the issues considered in the proposed FSP for another day.

The FASB also amended the disclosure requirements in SFAS 141R to eliminate the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB will require only that entities include the disclosures required by SFAS 5 and that those disclosures be included in the business combination footnote.

The FSP will have the same effective date as SFAS 141R, and therefore will be effective for all business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (January 1, 2009, for calendar year-end companies).

The FASB plans to issue the final FSP in March 2009. Companies that have closed or expect to close business combinations in the first quarter of 2009 should pay careful attention to the impact of the amended standard on contingencies that may be acquired or assumed in the transaction.