The Financial Accounting Standards Board is pulling back from its call for fair-value measurement of outstanding lawsuits when entities are reporting on newly acquired business units.

FASB published a proposed staff position that would revise Financial Accounting Statement No. 141R, Business Combinations, with respect to contingencies, or unresolved issues such as lawsuits that could lead to future assets or liabilities. FAS 141R requires entities to disclose contingencies and establish fair values for them that would be recorded as assets or liabilities at the time of a merger or acquisition.

Preparers, auditors, and especially attorneys have argued that establishing book values for uncertain events requires too much speculation and interpretation, not to mention too much revelation of legal strategies that would hinder outcomes.

The proposed amendment would specify that assets or liabilities arising from a contingency in a business combination must be recognized at fair value if fair value can be reasonably determined. The amendment also gives guidance on how to make that determination.

If the fair value can’t reasonably be determined, the guidance would direct preparers back to Financial Accounting Statement No. 5, Accounting for Contingencies, and Financial Interpretation No. 14, Reasonable Estimation of the Amount of a Loss. The proposed FSP would also amend the requirements around subsequent measurement and disclosures. With respect to disclosures, FASB is looking for information that enables financial statement readers to evaluate the nature and financial effects of a business combination as well as the effects of any adjustments arising from the transaction.

“While FASB believes that fair value is the most relevant measurement attribute for assets acquired and liabilities assumed in a business combination, the Board also acknowledges concerns raised by preparers, auditors, and members of the legal profession,” said FASB member Larry Smith in a written statement. “The proposed FSP addresses those concerns by requiring the use of fair value to value assets and liabilities arising from contingencies only when fair value is reasonably determinable.”

Greg Rogers, an attorney with Advanced Environmental Dimensions focused on environmental accounting and disclosure issues, said the guidance was even a little clearer than he expected. “It addresses the litigation issue directly and creates an expectation that other contingencies should be recorded at fair value,” he said.

Meanwhile FASB also is still working on a revision to FAS 5 for contingencies in general, even outside the context of a business combination. FASB published a planned revision to FAS 5 that made a similar call for fair-value measurement of all contingencies, and the proposal drew a comparable outcry of protest.

The board has developed a new model that attempts to address the concerns, and both models are undergoing field testing at a number of entities. The board plans to review the results and determine its next move in the spring of 2009, with a final standard effective no earlier than the end of 2009.

FASB is accepting comments on the proposed amendment to FAS 141R through Jan. 15, 2009.