Accounting for Pending Litigation and a Verdict Overturned on Appeal

According to the FASB, guidance on contingent liabilities applies to all entities, therefore corporations and partnerships should approach damage estimates similarly. FASB specifies that contingencies be measured at

In today’s world, the role of IT has turned accounting estimated critical in financial reporting and disclosure. Houghton and Fogarty have said that non-accurate or incorrect estimates have often caused to misstatements in audit report (Gray & Manson, 2007).

The company should report the change in the contingency accrual as a 2009 event due change in estimate. ASC 250-10-45-17 specifies that “a change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods.” Additionally, ASC 450-20-25-7 indicates that “all estimated losses for loss contingencies shall be charged to income rather than charging some to income and others to retained earnings as prior period adjustments”.

As ASC 450-20-25-2 states, an estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met:

An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met:

One liability that the amount must be estimated is associated with warranties. Many companies offer warranty coverage of their products. It is important for the potential warranty expenses to be calculated in the same period as the products are sold. This expense is usually estimated as a percentage of sales revenue based on historical data relating to warranty claims. In accordance with the matching principle and GAAP standards, the revenue and warranty expense must be recorded within the same reporting period. This is the only way to ensure that revenues are not overstated and liabilities are not overstated. In this way the financial health of a company can be accurately assessed. Contingent liabilities are another type of liability that must be estimated. Contingent liabilities are potential liabilities that are contingent upon certain circumstances. They are only potentially liabilities, however, they must still be recorded as such in accordance with the matching principle. One example of a contingent liability is a pending lawsuit. If the lawsuit is lost then the company will need to pay, therefore the money must be thought of as already spent until the lawsuit is final. Another example of a contingent liability occurs when one company cosigns

An accrual is not made for a loss contingency because any of the conditions in paragraph 450-20-25-2 are not met., b.  An exposure to loss exists in excess of the amount accrued pursuant to the provisions of paragraph 450-20-30-1.” Therefore, they also need to disclose the range of the possible loss with some explanation.

As per ASC 450-20-25-2, entities should accrue an estimated loss from a loss contingency by a charge to expense and a liability recorded only if both of the following conditions are met:

The caption commitment and contingencies that appears near the end of consolidated Balance Sheet has no amount and directs a reader's attention to the disclosures included in the footnotes. An amount is purposely not shown for a number of reasons. For example, the company’s lease/rent expenses grew from $13.8 mill in 2008 to $16.3 mill in 2010, yet asset retirement obligations for its leased facilities as of March 31, 2010 were not

“Resolution of the uncertainty may confirm any of the following: b. the reduction of a liability… d. The incurrence of a liability” says ASC 450-10-05-5. Also, ASC 450-30-25-1 shows that “A contingency that might result in a gain usually should not be reflected in the financial statements because to do so might be to recognize revenue before its realization.” This information shows that the company can record the reduction of the loss contingency in 2011, after the appellate judges reclined W Inc.’s rehearing because this is the resolution of uncertainty.

An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met:

“Liabilities are debts: money you owe. Every business carries some liabilities—for example, ongoing payments to suppliers, rent for your office, compensation to employees, or fees for contractors” (Mancuso, 2014). Added liabilities may result if a business is ravaged by a fire or flood or if the business owner(s) become the victim of a lawsuit—for example, a patron, client or customer decides to sue your company after hurting themselves on company property. It is the intent of this paper to examine the role and responsibility of liability in different types of businesses from sole proprietorships to

a) Contingent liabilities are potential losses by a company via unforeseen evenst such as court cases, product liability, or disaster. A contingent asset is one that provides unforeseen benefits to the company, which also results from an unforeseen future event. Because this cannot be foreseen in advance, it does not appear on the financial statements of the company, but it can appear on the financial statement notes. In the case of BP, amounts that the company can recover from third parties as part of its contractual rights can be considered contingent assets. These are only recognized int eh accounts if they are a virtual certainty to be received.

Further, the company records their contingent liabilities based on the estimation on the amount likely to be incurred on clearing the contingency. Contingent liabilities are incurred on legal claims on intellectual properties, law suits and paying employee benefits.

To determine if a company has future uncertainties such as a lawsuit, there should be a review of notes to the financial statements. According to Schroeder, Clark, and Cathey (2009), “review the notes to financial statements to determine if loss contingencies exist that may reduce future earnings and cash flows” (p. 158).