Case 10-5 Danle Corporation
In November 2008, Danle Corporation，a public company engaging in the design, development, manufacture, and assembly of motors，was sued because of safety issue of parts it manufactured. Danle made no disclosure of the lawsuit in Form 10-K since it determined that the risk of potential loss was remote and no amount of potential damages could be reasonably estimated. In October 2009, Danle was served a second complaint for the same reason. Danle’s external counsel believed that Danle could potentially be liable for a percentage of recovery. Management made no disclosure in Form 10-k for this fiscal year since they did not believe that it was probable a loss would occur and could not reasonably estimate an exact amount of the loss. For the first and second quarters of 2010, Danle disclosed related information about the loss in the notes to its financial statements in Form 10-Q. At the end of 2010, it disclosed updated related information of the loss in its notes to consolidated financial statements in Form 10-K. There are three issues in this case: 1) whether it was appropriate for Danle to omit the contingency loss; 2) SEC’s comments on Danle’s notes to 10-Q for the 1st quarter of 2010; 3) SEC’s comments on Danle’s notes to 10-K for year 2010. 1) The conclusion reached by Danle to omit disclosure relating to the class-action litigation is not appropriate. According to ASC 450-20-50-5, “Disclosure shall be made of those contingencies for which there is a reasonable possibility that a loss may have been incurred even though information may not indicate that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements.” Here reasonably possible means that the chance of the future event or events occurrence is more than remote but less than likely. Danle’s external counsel believed that Danle could potentially be liable for a percentage of the recovery. Therefore, even though it...
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