Burying the Hatchet Essay

1075 Words Apr 5th, 2016 5 Pages
Memorandum
To: Pat Tyler
From: Naz
Date: 4/17/16
Re: Mighty Mufflers Corp. (MMC) Loss Contingencies
Issues
The complexity of MMC’s accounting for its litigation liability must be addressed in three components. First, we must determine the amount necessary to be accrued as of December 2012 from the First Settlement. Next, we must determine the placement of the aforementioned accrual from the First Settlement on the income statement. Finally, we must determine how to account for the True-Up Payment as of December 2012.
In the First Settlement, MMC agreed to a total settlement of $30 million; $10 million of this is due in 2013, $10 million will be issued as a rebate on 2013 purchases made by plaintiffs, and the final $10 million will
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Codification
FASB Codification 450-20-55-10 dictates that we must consider the period in which underlying cause of litigation occurred, the probability of an unfavorable outcome, and if it is possible to make a reasonable estimate of loss.
Under FASB Codification 450-20-25-2, an estimated loss from a loss contingency shall be accrued by a charge to income if it is probable a liability has been incurred (at the date of the financial statements), and the amount can be reasonably estimated. It is important to note that “probable” means the future event is likely to occur.
FASB Codification 225-20-45-2, per 225-20-55-1 and per 225-20-55-2, provides that extraordinary items are events/transactions characterized by their unusual nature (“high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates”) and infrequency of occurrence (“not reasonably expected to recur in the foreseeable future”).
FASB Codification 450-20-55-27 assumes that a trial is ongoing/incomplete, but an unfavorable outcome is probable, as is the case regarding the Second Settlement and the True-Up Payment. The Codification indicates that the procedures for 450-20-25-2 be followed if both criteria are met. Subsequently, FASB Codification 450-20-55-28 provides that the minimum
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