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Accounting For A Loss Contingency Verdict Overturned On Appeal

1204 words - 5 pages

Re: Accounting for a Loss Contingency Verdict Overturned on Appeal
Date:

Relevant Facts:
• 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 estimated a loss between 15 and $20 million USD.
• $17 million USD was named as the most likely amount of loss.
• A jury trial took place on September 2009.
• On September 24 2009 the jury found in favor of W.
• The judgment required your company to pay W $18.5 million USD.
• In November 2009, your company filed an appeal.
• In December ...view middle of the document...

ASC 450-20-30-1 indicates that “when no amount within the range is a better estimate than any other amount…the minimum amount in the range shall be accrued.” Additionally, your company could assume a conservative position and accrue the liability at $20 million. However, M’s management has identified $17 million as the most likely amount of loss. ASC 450-20-30-1 dictates that, “If some amount within a range of loss appears, at the time, to be a better estimate than any other amount within the range, that amount shall be accrued.” Therefore, your company should record a journal entry, for at least $17 million, to properly reflect the liability in the balance sheet.

Sample Journal Entry:
Loss (Expense)…………………………………. 17,000,000
Contingent Liability-Litigation………………… 17,000,000

The nature of the contingency should be properly disclosed in the notes on the financial statements. ASC 450-20- 50-1 indicates that the “terminology used shall be descriptive of the nature of the accrual”. Any additional risk and losses should be included in the notes. ASC 450-20-50-3 states that “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…in excess of the amount accrued.” If your company accrues the most likely amount, $17 million, the notes should indicate that an additional three million could be lost as a result of the lawsuit.

Specific Issue 2:
For the year ended December 31, 2009, financial statements, should the company adjust its liability? If so where should the adjustment be reflected?

Options:
Adjust Liability Yes or No.

Independently of the appeal your company filed, once the court had issued a verdict, the contingency must be adjusted to reflect the amount awarded in the judgment. ASC 450-20-30-1 states that “if some amount within a range of loss appears at the time to be a better estimate than any other amount within the range, that amount shall be accrued.” The amount the court awarded to W, $18.5 million, is at this time, the most likely amount of loss within the estimated range. Therefore, a journal entry to accrue an additional $1.5 million USD loss contingency must be recorded.

Options:
a. Prior period adjustment.
b. Change in estimate (2009 event).

A prior period adjustment is a correction, for an accounting error, on the financial statements of a prior year. ASC 250-10-50-7 states that “when financial statements are restated to correct an error, the entity shall disclose that its previously issued financial statements have been restated, along with a description of the nature of the error. The entity also shall disclose …the...

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