Accounting for a Loss Contingency for a Verdict on Appeal
In this case we are presented with the scenario that a company faces a pending litigation. We are supposed to surmise how this liability will be reported, as well as, the resulting effects on the financials in the years in question. In my opinion, the primary accounting to be resolved is whether to accrue the liability, disclose the liability or simply count it is as immaterial and do nothing. As we progress through the scenario we are presented with subsequent facts which suggest that our decisions will indeed be impacted and changed due to litigation and we must act accordingly. The following are the questions asked by the case and my understanding of applicable GAAP. I will present my finds and an alternate for each to the questions with a conclusion to follow.
1. For the year-end December 31, 2007, financial statements, what amount should M record as a liability?
450-20-25-2 states that we must recognize a liability when it is probable and estimable. The facts in this case state, that management has ascertained that a loss is probable. They go on to state that there is a range of the estimated loss which is $15,000,000 to $20,000,000, with $17,000,000 being the most likely amount of loss within the range. In my opinion M should accrue the loss in 2007 for the amount of $17,000,000. The amount is determined with guidance from 450-20-30-1, which states to accrue the low end of a range, unless one estimate is more likely than another. That entry would be:
Lawsuit Loss $17,000,000
Lawsuit Liability $17,000,000
Alternate to question 1:
I believe that if management chooses to, they could make an argument to book the low end of the estimate. This fact is made apparent by the same section of the codification, 450-20-30-1 which allows the principle of conservatism. If there is a range of estimated losses, management could choose to accrue the low end of the range, if no...