ACCTG 300 HW

Powerful Essays
M International
Date: June 15, 2015
Prepared by: Fiona Wong
Reviewed by: Professor Amanda Hurley

ISSUE: Accounting for M International’s loss contingency for a verdict overturned on appeal.

BRIEF BACKGROUND OF COMPANY
W Inc, “W”, is a competitor of M International, “M”. In 2007, W filed a claim against M for patent infringement. By the end of that year, M estimated a $15-20 million loss, with $17 million being the most likely. On September 2009, a jury determined M has to pay $18.5 million in damages. Two months later, M filed an appeal to overturn the jury’s verdict. In December 2010, the Court of Appeals ruled in favor of M and overturned the $18.5 million judgment. W filed a petition for a re-hearing in January 2011, but the matter was closed in February, after the appellate judges declined the petition.

ACCOUNTING QUESTIONS
1. When the patent infringement case was filed in 2007, should a liability be recorded? If so, how much?
2. Should M adjust the previously recorded liability after a verdict is decided? Should the adjustment be recorded in 2009 or a prior period?
3. Should M record the reduction of the previously recorded loss contingency in 2010 or 2011?

SUMMARY CONCLUSION ON ACCOUNTING QUESTIONS
1. The amount is probable and there is a best estimate, $17 million will need to be accrued at the end of 2007, with a disclosure indicating the maximum loss of $20 million.
2. M should adjust the previously recorded liability in 2009 because that is the period in which the amount is determined. It should not be recorded in a prior period, because the amount is determined in 2009.
3. M should record the disclosure in 2010 that there might be a change in liability in the near term. However, recording the reduction should be done in 2011.

AUTHORITATIVE AND INTERPRETIVE GUIDANCE CONSIDERED
Refer to FASB no. 5
Refer to ASC 275-10-50 (Use of estimates in the preparation of financial statements)
Refer to ASC 450-20-05 (Overview and background of loss

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