Today during Office Hours, we had David Elsbree, Project Manager on the FASB’s project regarding disclosures for litigation-related loss contingencies.  During that discussion, two issues seemed to be at the heart of the debate over how the FASB should proceed with this project:  (1) Would  the required provision of potentially (upward) biased measures of contingent losses (as is argued would result from required disclosure of plaintiff claim amounts) mislead financial statement users?  And (2) Would required provision of details about litigation deemed to have only a remote chance of resulting in losses lead to “information overload” and cause users to miss the forest (important, higher-probability losses) for the trees?

It seems to me that existing academic research, especially that done by experimental researchers, has much to say about these conjectures, at least at the level of the effects of biased information and “too much” information on the judgments of recipients of such information.  To the extent that such research could be summarized and related to the FASB Staff and Board in plain language and in relatively short order, I believe this would be a valuable contribution to the debate here in Norwalk.

I believe that there are opportunities for archival empirical researchers to chime in as well.  By analogy, are there not other instances where firms are required to provide factual disclosures that are likely biased?  An example raised today was the standardized oil and gas disclosures under SFAS No. 69.  How to market participants react to information in those situations, and what might that foretell about the likely impact of requiring disclosures of claim amounts by defendants in their financials?

The FASB is likely to move forward on the Exposure Draft within the next several months, so time is of the essence.  But I think there are potentially valuable opportunities for academics to shed useful light on these debates if done quickly and communicated well.  Please feel free to contact me (Ray Pfeiffer, FASB Research Fellow, if you are interested in this and would like help.