The Financial Accounting Standards Board is bowing to outcry from preparers and attorneys that accounting requirements around pending legal actions in business combinations are unworkable.

In its regular weekly meeting Oct. 29, the board determined it will publish a staff position to amend Financial Accounting Statement No. 141R, Business Combinations. The amendment will try to sort out the collision that is occurring with the controversial new standard on business combinations, the highly controversial requirements around measuring fair value, and the continued quest to make U.S. rules more like international rules even when the U.S. has a far different legal system than most other countries.

When accounting for a merger or acquisition, FAS 141R requires that any contractual and non-contractual contingencies, or uncertain events like lawsuits that might result in assets or liabilities, be measured at fair value on the date of the acquisition. The standard is set to take effect for calendar-year companies in 2009. FASB's handout for the meeting describes a number of concerns from constituents about the difficulty in valuing such contingencies, including difficulty in determining whether a contingency is more likely than not to lead to a liability, distinguishing between contractual and non-contractual contingencies, accounting for expected settlement, how to derecognize a liability, and how to account for legal feels.

Chairman Bob Herz lamented that in the current U.S. legal environment, where litigation is far more prevalent than in other countries, companies are in a tough spot. FAS 141 was adopted in tandem with an international rule on business combinations as part of the U.S. effort to move U.S. rules closer to international rules. “We’re going to have to admit that unless we change our (legal) system here, we almost have to have a U.S. carve-out,” he said. That’s a tough pill for U.S. rulemakers or regulators to swallow when they have pledged to move U.S. capital markets toward the international platform on a condition that all countries follow the same rules and resist the urge to adopt national variations.

The board determined it will specify that initial recognition and measurement of assets and liabilities arising from contingencies should follow a model similar to the one in the original rule on business combinations, FAS 141. They’ll offer additional clarification of situations where fair value is “reasonably estimable,” modeled after the guidance contained in FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations.

The Board also agreed it will stand its ground on FAS 141R’s requirements for subsequent measurement for assets and liabilities initially recognized at fair value, but will provide additional clarification to address questions around derecognition. That may help answer concerns some constituents have raised about acquiring assets that it plans to discard following an acquisition, for example.

FASB also determined that disclosures should include the nature of the contingency and an explanation for how its value was measured. If not at fair value, the company should be expected to say why it couldn’t measure according to fair value. Any additional disclosures would depend on the initial measurement attribute applied.

In a roundtable on fair value at the Securities Exchange Commission this week, an executive for publicly held KeyCorp said the intersection of FAS 141R with Financial Accounting Statement No. 157, Fair Value Measurements caused Key to abandon an otherwise viable acquisition. “The ramifications (of FAS 141R and FAS 157) caused Key not to consider this particular acquisition and others throughout the year,” said Charles Maimbourg, senior vice president of accounting policy and research for KeyCorp.

That was a zinger for regulators and rulemakers, who contend accounting rules should reflect business decisions, not drive them. SEC chief accountant Wayne Carnall did an audio double take. So even though the economics were there, “the accounting drove the decision?” he asked. Indeed, Maimbourg confirmed.