Request to Client Request II
November 25, 2013
FROM: Consulting Firm
DATE: November 25, 2013
SUBJECT: Pending Lawsuit Effects
FASB stipulations affect financial statements, mortgages, and patents when a business entity loses a case. This memo describes Codification 450-10-05-4 of the Financial Accounting Standards Board (FASB) that details the proper reporting of gain and loss contingencies, as well as standards for financial statements. This memo will provide relevant information concerning pending lawsuit effects for the use of clients and affected stakeholders.
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The amount of loss to be charged can be reasonable estimated since the amount of the lawsuit is stipulated. Hence, the loss contingency arising from the pending lawsuit can be charged to the business’ income only when it satisfies the two given conditions.
Renegotiating Mortgage Debt: The business is legally liable to bear the full burden for any incurred lawsuit award and retains the sole obligation to pay off debts. In cases of mortgage debt, FASB guidelines stipulate that the mortgage lender can renegotiate a contract with the concerned business entity to arrange for the mortgage debt repayment. Some states have even passed laws that allow a lender to require a repayment scheme, particularly if other assets are included. Determinations of the mortgage debt payment are left to the lender’s discretion, whereby the lender can choose to forgive or modify a loan via a loan modification process (National Association of Realtors, 2011). Any gain or loss arising from the renegotiated contract must be recorded in the current period. In the event the lender decides to forgive a percentage of the mortgage debt, the amount forgiven is accounted as a taxable income.
Generally, the borrower is required to pay tax on the amount of mortgage debt forgiven. However, the passage of the Mortgage Forgiveness Debt Relief Act of 2007 eliminates the need for borrowers to pay such tax liabilities, but it is limited to primary residences only (IRS, 2012). Borrowers are advised to consult with reputable bankruptcy attorneys to verify qualifications as several restrictions are in placed under this piece of legislation.
Filing Bankruptcy: The Bankruptcy Code safeguards any business not able to pay its debt via a process of reorganization. This option entails restructuring the business assets under a trustee to repay the debt through time; in no way are debts discharged or forgiven under this option. In addition, the Bankruptcy Code prohibits modifications on the first mortgage for a primary residence. However, the principal balance and interest rate of mortgages on non-homestead property are eligible for reorganization. Lastly, the Bankruptcy Code requires ongoing financial reporting. Businesses need to list income and expenses in a monthly financial report (United States Courts, 2012).