Accounting For A Loss Contingency For A Verdict Overturned On Appeal
Date: July 15, 2015
To: M International
From: Team 17
Re: Accounting for a Loss Contingency for a Verdict Overturned on Appeal
M International and W Inc. have been engaged in long-standing litigation over a specific patent infringement matter. Pertains to the accounting for this contingency loss, this memo has made the following conclusions:
1. For the year-end December 31, 2007, financial statements, M should record $17 million as a liability.
2. M should adjust its liability for the year-end December 31, 2009, financial statements. $1,500,000 should be recorded. And this adjustment should be considered a 2009 event.
3. M should record 18.5 millions of dollar as a reduction of the previously recorded loss contingency in 2010.
1. For the year-end December 31, 2007, financial statements, what amount should M record as a liability?
In this case, the management of determined that a loss for the patent infringement was probable and represented that the estimate of loss was in the range of $15 million to $20 million and $17 million was the most likely amount of loss within the range.
Per 450-20-55-32 through 35,
“Case D: Range of Loss and One Amount is a Better Estimate than Any Other
55-32 Assume that in Case A and Case B that condition in paragraph 450-20-25-2(a) has been met and a reasonable estimate of loss is a range between $3 million and $9 million but a loss of $4 million is a better estimate than any other amount in that range.”
“55-33 In this Case, paragraph 450-20-30-1 requires accrual of $4 million.”
In this case, $17 million should be accrued because this is the most likely amount of loss.
“55-34 Paragraphs 450-20-50-1 through 50-2 require disclosure of the nature of the contingency and, depending on the circumstances, may require disclosure of the amount of the accrual.”
“55-35 Paragraphs 450-20-50-3 through 50-8 require disclosure of the exposure to an additional amount of loss of up to $5 million.”
Back to our case, M should disclose $3 million