Accounting for Pending Litigation and a Verdict Overturned on Appeal

791 Words Jan 11th, 2014 4 Pages
Accounting for Pending Litigation and a Verdict Overturned on Appeal
Our team is given the task to account for a pending litigation. We are to determine how pending litigation should be reported on the current and future financial statements. M Corporation was sued for patent infringement and we will present whether M Corporation should accrue a liability, disclose a liability, do both, or do nothing. The case accounting for the litigation and the subsequent overturned verdict was ongoing for four years between M Corporation and W Corporation and, as litigation is unpredictable, changes will have to be made accordingly. We will present how M Corporation should a) account for the pending litigation in 2007 - the year the claim was
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Based on this information, only an immaterial amount of companies actually accrue a liability in their financial statement. Therefore, M Corporation will simply provide disclosure of the contingency and an estimate of the possible loss or range of loss for the future pending litigation in its 2007 financial statement under Note: Contingencies and Commitments. If M Corporation accrued a liability on its 2007 financial statements, then the company becomes too transparent to opposing counsel and it could have serious adverse effects on M’s operations.
Considering real world practices, as well as in accordance with the conceptual framework from the textbook, accrual of a loss from ongoing litigation is rare. Companies usually do not record a loss until after the ultimate settlement has been reached. For example, the Las Vegas Sands Corporation, in a recent quarterly report, disclosed but did not accrue damages from a lawsuit it lost, even after the award was affirmed by the trial court, because the company believe that it has valid bases in law and fact to overturn or appeal the verdict. Consequently, M corporation should not accrue the contingency loss but continually disclose the matter even when a judgment was reached against the corporation to pay $18.5 million in 2009, given that the…

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