After all, once a plaintiff knows how much a company can pay, "Who's going to settle for less? The very act of disclosure becomes an admission that binds the company," she says.

Currently, a company must disclose a lawsuit only if there is a reasonable possibility that a loss has occurred. FAS 5 does not change accounting for litigation: a company would continue to record as a liability any lawsuit for which a loss is probable and can be estimated.

Many comment letters argue that there is no evidence that the current 33-year-old rule needs an overhaul, and challenge FASB to provide empirical evidence that such a proposal is needed, calling it "a solution in search of a problem."

Supporters of the amendment say that recently some companies have been less than forthcoming about their litigation risk. Those companies "assert too often that they cannot reasonably estimate their exposure to loss contingencies and therefore provide no disclosures about them until they are substantially resolved," explains Patrick Finnegan, director of the financial reporting policy group at the CFA Institute. Naturally, adds Finnegan, those disclosures "catch investors by surprise."

Since many companies would rather settle than risk a trial and disclosure of fresh litigation to investors, the amendment "could lead to more instances where unscrupulous plaintiffs try to blackmail companies or manipulate their stock price," says Thomas Quaadman, executive director with the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.

A company would not want to estimate its potential loss too high, but too low an estimate could spur lawsuits from shareholders who suspect the company of low-balling a potential loss in an effort to mislead them, letters point out. Also, a plaintiff could use fear of a shareholder lawsuit to extort a quick settlement.

Under the amendment, a company must render a qualitative assessment of a lawsuit's potential harm, which would include the underlying assumptions of estimated loss and an assessment of the lawsuit's most likely outcome. Finally, the company must describe, quantitatively and qualitatively, its insurance policies and other indemnification agreements that could help it recoup some or all of the possible loss.

Critics say that each disclosure under the amendment would involve the passing of sensitive information through channels both inside and outside a company.

A company would need to develop and implement sound–and potentially expensive–internal controls to make sure only the right eyes see the information, and the 2002 Sarbanes-Oxley Act would make a public company test those controls at an additional cost.

The amendment could also force the disclosure of unreliable information, which would affect investors' ability to make reasoned decisions, critics claim. That's because litigation in the U.S. involves an inherently unpredictable and often multi-year process, the critics say.

For example, an appellate court could slash the damages a jury awarded to a plaintiff. In that case, the amendment would have a company disclose "this huge exposure to losses that we know is not going to happen and I don't know who's going to benefit from that," says Jeff Sisk, director of accounting research and activities at Cummins Inc., a Columbus, Ind.-based manufacturer of diesel engines.

Furthermore, "litigation is an adversarial system, not a truth-telling system," says Bill Ide, who heads the American Bar Association's attorney-client privilege task force. Since a judge or a jury must rule that a factual determination has been made in a lawsuit, all disclosures prior to a ruling would reflect only opinions, he says.

Companies–and their attorneys–also say the disclosures would erode attorney-client privilege. "Any additional information that a defendant is required to disclose can and will be used against them" by a plaintiff, warns Gary Kabureck, vice president and chief accounting officer at Xerox Corp., based in Norwalk, Conn. In contrast, the amendment would not require the disclosure of information relevant to a plaintiff's strategy. The Chamber's Quaadman argues that as legal entities, a company and an individual should enjoy the same constitutional right to an attorney.

To be fair, the amendment would allow a company to withhold information in those "rare instances" where a disclosure might give a plaintiff an advantage. However, "no one believes [FASB's] going to hand out exceptions to [the amendment] regularly," says Hackett. "It's not a protection that would protect anyone." Other commenters said that companies would try to abuse this exception.

However, some supporters say the amendment does not go far enough. "If there is a long-term, severe financial threat that a company is aware of, it should be disclosed to shareholders regardless of whether it's expected to be resolved within the 12 month period," says Jamie Carroll, project manager at the Teamsters' capital strategies department. As for the possibility of "rare" exceptions to disclosure, "Frankly, we think that clause ought to be further restricted and defined," says Carroll.

None of this so far has changed FASB's plans for the amendment, which include a roundtable and field testing in the next few weeks and adoption by year-end. If adopted, the amendment would apply to annual financial statements issued for fiscal years ending after Dec. 15, 2008, and to all financial statements thereafter.

Quaadman says the amendment could have repercussions beyond the U.S. "There is a lot of capital … that's reluctant to come here because of our country's litigious trial system." he says.