Case 13-08
Accounting for a Loss Contingency for a Verdict Overturned on Appeal
Facts of the Case
The scenario that present this case is a company faces litigation. I have to surmise how this liability will be reported as well as the resulting effects on the financial statements in the years presented. I will present some facts of this case, and by these facts I will resolve the primary accounting which in my opinion it could accrued the liability, disclose the liability or count it as immaterial. W Inc and your company have been engaged in litigation over a specific patent infringement matter. In May 2007, W filed a claim. On December 31 2007, your company determined that a loss in connection to the claim was probable. The company
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Even though the minimum amount in the range is not necessarily the amount of loss that will be ultimately determined, it is not likely that the ultimate loss will be less than the minimum amount. “
Based on this information M should record a liability in the amount of $17 million. This amount is determined with ASC 450-20-30-1. The journal entry would be:
Dr. Lawsuit Loss $17,000,000 Cr. Lawsuit Liability $17,000,000
Question 2
For the year-end December 31, 2009, financial statements, should M adjust its liability? If so, what amount should be recorded; and should the amount of the adjustment be considered a 2009 event or a prior period adjustment?
For the year ended December 31, 2009, financial statement M should adjust its liability to $18.5 million FASB 450-20-50-3 through 450-20-50-8 required disclosure of additional exposure to loss if there is a reasonable possibility that there are additional amount to be paid. The amount of the adjustment would be considered 2009 an event period adjustment.
FASB 450-20-50
50-3 Disclosure of the contingency shall be made if there is at least a reasonable possibility that a loss or an additional loss may have been incurred and either of the following conditions exists:
a. 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
On December 31 2007, your company determined that a loss in connection to the claim was probable.
$8 mill needed to be deducted from net income on the income statement. They should have followed (Following) with disclosure notes to describe why this error occurred and how it impacted the statement and accounts that it touched. For instance, the notes would describe the presence of the correction on the current period of beginning inventory, and retainED earnings.
25-7 If a loss cannot be accrued in the period when ti is probable that an asset had been impaired or a liability had been incurred because the amount of loss cannot be reasonable estimated, the loss shall be charged to the income of the period in which the loss can be reasonably estimated and shall not be charged retroactively to an earlier period. 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.”
1. According to the case, it shows that management of M determined that a loss would be “probable” and the estimate range would be $15 million to $20 million. However, they determined $17 million would be the “most likely” amount of loss.
A loss contingency as per ASC 450-10-20 is “An existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur. The term loss is used for conveniences to include many charges against income that are commonly referred to as expenses and others that are commonly referred to as losses.” Contingent liabilities depend on the occurrence of one or more future events to confirm the: amount payable, the payee, the date payable, or its existence.
1. A liability, estimated at $157,050 at December 31, 2012, was settled on February 26, 2013, at $175,160.
There has been an error in the court system. Apparently, the court has associated this date of injury with a different issuer. We have been in constant contact with the applicant’s attorney to correct this issue. The employer on the Application for Adjudication of Claim clearly listed Salinas Tallow Company, LLC as the employer, but for some reason, the court had a different employer listed. As soon as we fix this error, we will file a Notice of Representation. I will then file an Answer to the Application for Adjudication of Claim, specifically asserting our statute of limitation
If, at year end, 2 months have elapsed, what adjusting entry do you record? 2,000 A. Prepaid Legal Expense Legal Expense 2,000 2,000 B. Legal Expense Prepaid Legal Expense 2,000 Legal Expense 3,000 C. Prepaid Legal Expense 3,000 12,000 D. Prepaid Legal Expense Cash 12,000 [10]BASIC BANK10 - COAE 010 On September 1, your firm incurs a routine $82 expense, mistakenly recording it as follows: Office Expense Accounts Payable 28 28
Therefore, more than $25,000 should be recorded – the $50,000 (two payouts and the expected value) can be justified.
b. The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The quantitative approach described in the definitions of the terms expected losses, expected residual returns, and expected variability is not required and shall not be the sole determinant as to whether a reporting entity has these obligations or rights.”
An assumption inherent in an enterprise 's statement of financial position prepared in accordance with generally accepted accounting principles is that the reported amounts of assets and liabilities will be recovered and settled, respectively. Based on that assumption, a difference between the tax basis of an asset or a liability and its reported amount in the statement of
Considering real world practices, as well as in accordance with the conceptual framework from the textbook, accrual of a loss from ongoing litigation is rare. Companies usually do not record a loss until after the ultimate settlement has been reached. For example, the Las Vegas Sands Corporation, in a recent quarterly report, disclosed but did not accrue damages from a lawsuit it lost, even after the award was affirmed by the trial court, because the company believe that it has valid bases in law and fact to overturn or appeal the verdict. Consequently, M corporation should not accrue the contingency loss but continually disclose the matter even when a judgment was reached against the corporation to pay $18.5 million in 2009, given that the
The major accounting issue in this case is that the Geo failed to consider the arbitration award to compute its net capital. Also, failed to report the loss and liability of $949,688 in its 2005 financial statements for the Arbitrator’s award. Under GAAP principles, all companies are required to report all losses and liabilities in their financial statements for a loss contingency. The ASC 450 defines the accounting requirements for loss and gain contingencies. According to this section, the loss contingency should be recognized if it met two conditions. First, when the loss has incurred at the reporting date. Second, when the loss amounts can be reasonably estimated. Also, thus sections forced all companies to disclose their losses in the
1. To what extent has the firm been taking care of these sort of cases?
“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