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Danle Corporation – Case 10-5 Discuss whether you believe that the conclusion reached by Danle to omit disclosure regarding to the class-action litigation was appropriate for the year ended December 31, 2009. In our opinion, it was not appropriate for Danle Corporation to omit disclosure relating to the class action lawsuit for the year ended December 31, 2009. First, it must be noted that ASC 450-20-25-2 indicates the following: 25-2 An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met: a. Information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that…show more content…
The counsel used the specific phrasing “potentially, but not probably”, which logically could be interpreted to fall into the “Reasonably possible” category as it does not seem remote. The reasonably possible criterion indicates that the chance of the future event or events occurring is more than remote but less than probable. If we are to interpret this case as reasonably possible but not probable or reasonably estimable, we can say that the losses in question meet the ASC 450-20-50-3 criteria, thus requiring disclosure. Also, given that the fallout from this litigation could have a potentially significant detrimental impact on investors and other stakeholders, it is necessary for disclosure to be made as it could considerably affect future net cash flows. If Danle’s Form 10-Q for the quarter ended March 31, 2010, were to be reviewed by the SEC’s Division of Corporation Finance, what comments may Danle expect to receive regarding its disclosure in that period? Discuss the basis for the comments you have identified. The SEC’s Division of Corporate Finance will delve into the materiality of the litigation and what was the
reason for omission of the same from the prior year’s 10-K, when disclosure should have been necessary as well. There was no 8-K filed about the matter also which is odd given that a class action lawsuit of this magnitude should be considered a significant
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