The Financial Accounting Standards Board has decided to discontinue its loss contingencies disclosure project after it met with nearly unanimous opposition in the comment letters received by the board.

Many companies had worried that the disclosure of their loss contingencies might expose them to legal action and increase the amount of liabilities they would need to set aside in case of an unfavorable judgment. After reviewing the comment letters, the board decided by a 5-2 vote at a meeting Monday to remove the project from its technical agenda.

“Based on feedback received from a wide range of constituents on two exposure drafts over a period of four years, the board concluded that existing loss contingency disclosure requirements are adequate,” said FASB chair Leslie F. Seidman in a statement. “As a result of the increased scrutiny of loss contingency disclosures in recent years, the board concluded that improvements to financial reporting are more likely to be achieved through robust compliance than through additional standard setting. Later this month, the board plans to issue an Invitation to Comment on a Disclosure Framework, which we hope will initiate a broader dialogue about how the Board should establish disclosure requirements, as well as how a reporting entity should comply with requirements in a manner that is most relevant to the users of its financial statements.”

FASB issued that Invitation to Comment on Thursday (see FASB Asks for Feedback on Disclosure Framework).

FASB had originally added the project on Disclosures about Certain Loss Contingencies to its agenda back in 2007. The main reason at the time was to respond to requests to enhance disclosures about environmental exposures and litigation contingencies, although the focus of concern in many of the comment letters has related to disclosure of possible litigation.

FASB issued an initial exposure draft in 2008, proposing expansive new disclosures about evolving loss contingencies.  The board received 242 comment letters, many of which raised concerns that the proposed disclosures would force companies to waive attorney-client privilege, and the proposed disclosures would also interfere with an organization’s ability to defend itself, according to a backgrounder from FASB.  Concerns also were raised about specific disclosures, as well as the overall costs of compliance relative to the expected benefits.

The board members discussed those concerns, and in 2010, they came out with a second exposure draft, which generally limited the new disclosures to known facts and the contention of the parties. FASB received another 339 letters in response to that second exposure draft. But instead of signaling reassurance with the limited disclosures, those letters indicated continuing concern about the potential prejudicial effect of the new disclosures on the outcome of pending litigation. Many of the people writing comments expressed the view that the fundamental issue was lack of compliance with some of the existing disclosure requirements rather than a need for additional disclosure requirements.

FASB directed its staff to work with the staff of the Securities and Exchange Commission and the Public Company Accounting Oversight Board to understand their efforts to address investor concerns about the disclosure of certain loss contingencies through increased focus on compliance with existing rules. There was a general sense that disclosures improved in response to the SEC staff’s “Dear CFO letters” relating to the financial industry, and other heightened scrutiny of disclosure in this area. This project was also identified as a low priority by two of FASB’s outside advisory groups, the Financial Accounting Standards Advisory Council and the Small Business Advisory Committee, at recent meetings.

The Invitation to Comment on a Disclosure Framework that FASB issued Thursday will provide guidelines for the board in establishing disclosure requirements that are more adaptable to different situations, along with guidelines for reporting entities in complying with those requirements.