Accounting for Pending Litigation and a Verdict Overturned on Appeal
Our team is given the task to account for a pending litigation. We are to determine how pending litigation should be reported on the current and future financial statements. M Corporation was sued for patent infringement and we will present whether M Corporation should accrue a liability, disclose a liability, do both, or do nothing. The case accounting for the litigation and the subsequent overturned verdict was ongoing for four years between M Corporation and W Corporation and, as litigation is unpredictable, changes will have to be made accordingly. We will present how M Corporation should a) account for the pending litigation in 2007 - the year the claim was filed by W b) account for the verdict and judgment in 2009 c) account for the overturned verdict in 2010 d) account for the closure of the litigation in 2011 and e) account for any prior period adjustments if needed. We will compare and contrast FASB Codification, SEC Rulings, real world financials, and utilize conceptual framework to demonstrate our accounting method for this case.
Because litigation is unpredictable and complex, M Corporation should not accrue a liability on the 2007 financial statements. Management determined a loss was probable and estimated the loss to be in the range of $15-20 million with $17 million being the most likely amount of loss. According to FASB Codification 450-20-25-6, losses that are reasonably estimable shall not be accrued because the losses relate to a future period rather than current or prior period. Also, per FASB Codification 450-20-25-8, general or unspecified business risks do not meet the conditions for accrual in 450-20-25-2, so no accrual for a future loss will be made. Additionally, Fordham Journal of Corporate & Financial Law, volume 15, issue 2, article 3, states that 64% of SEC registrants sampled reported being sued, only 9.5% of them accrued any liability for pending...
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