U.S. Steel Corp., America's largest steelmaker by market value, and Allergan Inc. are among U.S. companies that criticized a proposed accounting-rule change calling for more disclosure of potential losses from lawsuits.
    
The proposal by the Financial Accounting Standards Board, or FASB, would require companies to tell investors on financial statements what they think the outcome of pending and threatened litigation would be and how much it might cost.

"The proposed statement infers an ability to assess outcomes that simply does not exist," Irvine, California-based Allergan, the maker of the glaucoma treatment Lumigan, wrote in its July 16 comment letter to the accounting board.

FASB, which establishes accounting and reporting standards in the U.S., proposed the changes to loss-contingencies disclosure in a June 5 "exposure draft." The deadline for comments is Aug. 8. The board currently has 19 comment letters on its Web site, including from Mayfield Village, Ohio-based insurer Progressive Corp. and groups such as the Association of Corporate Counsel and the Chicago Bar Association.

The accounting board, based in Norwalk, Connecticut, proposed the changes because investors and other users of financial reports said existing rules don't provide enough information to assess "the likelihood, timing and amount of future cash flows associated with loss contingencies," according to a FASB summary.

Claim Estimate

Companies would be required to disclose the amount or an estimate of a claim, the maximum potential loss and what the insurance coverage might be. They also would have to explain how the dispute arose, its status, the expected timing of its resolution and the most likely outcome. They would have to provide a table showing the total potential losses from litigation at the beginning and end of a period.

The changes would take effect in time for annual statements issued for fiscal years ending after Dec. 15. FASB may conduct roundtable discussions on the proposal in October, according to an e-mail from board spokeswoman Christine Klimek.

Under current rules, companies provide an estimate of the loss only when a reasonable one can be made. Some investors say that isn't enough.

"Shareholders should be able to make their own determination about the exposure," Michael J. Barry, a partner with Grant & Eisenhofer, a Wilmington, Delaware, law firm that represents investors, said in an interview.

`Very Insightful'

Disclosing the reason a company has the obligation "will be very insightful, as will the tabular display of the amount of loss recognized," Charles Mulford, an accounting professor at Georgia Institute of Technology, said in an e-mail.

In their comment letters, the companies say the most troubling aspects of the proposal are its requirements that they estimate the maximum possible exposure and give details that will reveal their litigation strategy.

"The disclosure of numbers, even if stated as a range, often creates a false sense of certainty to what, in many cases, are very speculative and uncertain matters," Gretchen R. Haggerty, chief financial officer of Pittsburgh-based U.S. Steel, wrote in her July 24 letter.

In its letter, Allergan offered the example of the U.S. Supreme Court's June 25 decision that, 19 years after the 1989 Valdez disaster, cut the $2.5 billion punitive-damages award against Exxon Mobil Corp. to $507.5 million.

`Runs the Risk'

Such disclosure also "runs the risk, and more likely the reality, of revealing aspects of defendant's analysis of the claim that have historically and appropriately been guarded in adversary proceedings," according to the Allergan letter, signed by Chief Financial Officer Jeffrey L. Edwards, General Counsel Douglas S. Ingram and Corporate Controller James F. Barlow.

In a letter dated yesterday, Progressive Chief Legal Officer Charles E. Jarrett said one proposed requirement should be eliminated: the disclosure of a potential "severe" loss, however likely, that is expected to be resolved within a year.

"By indicating that a given lawsuit is expected to be resolved in the near term, the reporting entity could be inadvertently signaling to opposing counsel that its management is pressuring its lawyers to bring the litigation to a speedy conclusion," Jarrett wrote.

Attorney-Client Privilege

The new rules also may infringe on the attorney-client privilege, because lawyers would have to explain more about litigation strategy to auditors, companies said.

"Even if you can aggregate the potential losses, there's the possibility that you're waiving privilege by giving the information to the auditors," Alan Raylesberg, a partner at New York law firm Chadbourne & Parke, said in an interview. "In litigation, someone could say, `What did you give the auditors?"'

The proposal includes an exception for disclosures that might hurt a company's position in a lawsuit. Companies would be allowed to group claims to avoid revealing details on individual cases or exclude prejudicial information. Those situations should be rare, FASB said.