According to ASC 450-20-25, when a loss contingency exists, the likelihood includes three areas: probable, reasonably possible and remote. In ASC 275-10-50-8, the definition of the term reasonably possible means that the chance of a future transaction or event occurring is more than remote but less than likely. In the case, it is believed that Danle could potentially, but not probably be liable for a percentage of recovery in the claim, so we believe Danle’s loss contingency should be reasonably possible.
Although it believed that the amount of potential loss was less than 50 percent of the amount claimed which is approximately $250 million, it could be material effect to the financial statements. Based on ASC 275-10-50-8, when it is reasonably possible that the estimate of the effect on the financial statements exists and the effect of the change would be material, disclosure regarding such estimate should be made when known information available before the financial statements are issued.
Danle said that it did not believe that it was probable a loss would occur and could not reasonably estimate an exact amount of the potential loss. However, it is also stated in the paragraph 450-20-50-5 that disclosure is preferable to accrual when a reasonable estimate of loss cannot be made. Even though it is not probable that a liability had been incurred, disclosure also should be made for some loss contingencies for which there is a reasonable possibility that a loss may have been incurred.
In conclusion, we believe that it was not appropriate for Danle to omit disclosure relating to the class-action litigation for the year ended December 31,