US fear new accounting rules could “prejudice” court actions

Opposition is mounting to new accounting rules which would force US
corporations to reveal potentially prejudicial information on class action

The Securities and Exchange Commission is investigating the impact of new
litigation-liability rules, which aim to increase the financial information
companies publish on court actions taken against them.

UK companies use the international accounting rule known as IAS 37 where
companies disclose a potential liability associated with a court action if there
is a more than 50% chance they will have to pay damages. The value recorded in
the financial statement represents the company’s “best estimate” of this

In the US, corporations adhere to much softer local accounting rules which
allow the disclosure of similar court liabilities, but much later in the
litigation process. The US is considering adopting the international rule, which
has raised fears companies may be leaking prejudicial information in their
published accounts.

The rules will worry the litigation prone tobacco and pharmaceutical
industries which routinely face large court actions.

A well-known US law firm, in a July briefing note seen by Accountancy Age,
described the US proposals as “deeply flawed” and believed the rules “could have
a prejudicial effect on entities facing litigation contingencies.”

Susan Hackett, senior vice-president of the Association of Corporate Counsel
the Financial Times
, said the proposals could prejudice US court actions.

“The only folks who benefit from this are people on the plaintiff’s bar,” she
the newspaper

The issue will be a significant obstacle as the US decides whether to adopt
international accounting rules, with fears it will create more problems than it
solves in the aggressive US legal environment. The aim of the rules is to paint
a more accurate risk profile for investors and shareholders.

“IAS 37, even as it stands at the moment, is a real issue for convergence
with US [accounting rules] because of the issue of providing for and disclosing
litigation liabilities,” said Kathryn Cearns, technical accountant with law firm
Herbert Smith.

Further Reading:

groups warn on lawsuit proposals

looms over accounting for legal bills

37 rule on legal costs set to cause confusion – Accountancy Age

Related reading

Fiona Westwood of Smith and Williamson.