Case 13 08 Loss Contingency

Topics: Jury, Balance sheet, 2009 Pages: 7 (1331 words) Published: May 12, 2015
Case 13-08
Accounting for a Loss Contingency for a Verdict Overturned on Appeal Facts of the Case
The scenario that present this case is a company faces litigation. I have to surmise how this liability will be reported as well as the resulting effects on the financial statements in the years presented. I will present some facts of this case, and by these facts I will resolve the primary accounting which in my opinion it could accrued the liability, disclose the liability or count it as immaterial. 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 2010, the court of appeals overturned the jury verdict and the $18.5 million judgment. On January 6th 2011 W filed a petition for re-hearing.
On February 10, 2011, the appellate judges declined W’s petition.  On February 28 2011, the company’s management determined that the lawsuit was closed. 

According to ASC 450-20-20 (Glossary) defines:

Contingency 

An existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an entity that will ultimately be resolved when one or more future events occur or fail to occur. Gain Contingency 

An existing condition, situation, or set of circumstances involving uncertainty as to possible gain to an entity that will ultimately be resolved when one or more future events occur or fail to occur. Loss Contingency

An existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur. The term loss is used for convenience to include many charges against income that are commonly referred to as expenses and others that are commonly referred to as losses. Probable 

The future event or events are likely to occur.
Reasonably Possible 
The chance of the future event or events occurring is more than remote but less than likely. Remote 
The chance of the future event or events occurring is slight.

Question 1
For the year-end December 31, 2007, financial statements, what amount should M record as a liability? This case shows that management of M determined that a loss would be “probable” and the estimate range would be $15 million to $20 million. However, they determined $17 million would be the “most likely” amount of loss. According to ASC 450-20-25-1, “When a loss contingency exists, the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability can range from probable to remote. As indicated in the definition of contingency, the term loss is used for convenience to include many charges against income that are commonly referred to as expenses and others that are commonly referred to as losses. The Contingencies Topic uses the terms probable, reasonably possible, and remote to identify three areas within that range. An estimated loss from loss contingency shall be accrued by a charge to income if both of the following conditions according to FASB 450-20-25-2 are met: a) Information available before the financial statements are issued or are available to be issued indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statement. b) The amount of loss can be reasonably estimated.

FASB 450-20-30-1 states
“If some amount within a range of loss appears at...
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