Case 13-08 overview M international (M) and W Inc (W) decided to enter a long term litigation, due to a patent rights violation. M being the demandant and W the respondent. Not enough information was provided in relation to the charges or the patent. To properly understand the events a chronological descripcion of the litigation is to be provided. Events: Problems to be addressed Is necessary to understand the proper and logical accounting literature to address the matter previously presented. The case it self provides a series of matters to be attends, these matters have to be address in accordance to the General Accepted Accounting Principles. Matters to be discussed: * The liability to be recorded by M …show more content…
A loss contingency as per ASC 450-10-20 is “An existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur. The term loss is used for conveniences to include many charges against income that are commonly referred to as expenses and others that are commonly referred to as losses.” Contingent liabilities depend on the occurrence of one or more future events to confirm the: amount payable, the payee, the date payable, or its existence. When a loss contingency exists, the likelihood that the future event or events will confirm the incurrence of a liability can range from probable to remote. FASB uses the terms probable, reasonably possible, and remote to identify three areas within that range and assigns the following meanings. * Probable: The future event or events are likely to occur. * Reasonably possible: The chance of the future event or events occurring is more than remote but less than likely. * Remote: The chance of the future event or events occurring is slight. As per ASC 450-20-25-2, entities should accrue an estimated loss from a loss contingency by a charge to expense and a liability recorded only if both of the following conditions are met: * a.
In accordance section 465 (2) of the IRC, which states that the loss shall not exceed the indebtedness in the corporation, In this case the at risk limitation is not met since there is no Debt basis because Mr. Estefan did not personally lend money to the company. This is why the stock basis does not include the bank loan of $25,000 from the bank. Although the Mr. Estefan classifies as an active member of the business and that is his sole source of income, he would still have to carryover the loss since all 3 limitations must be met. This is in accordance with section 1366
According to ASC 450-20-25-1, “When a loss contingency exists, the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability can range from probable to remote. As indicated in the definition of contingency, the term loss is used for convenience to include many charges against income that are commonly referred to as expenses and others that are commonly
Subject: Haig Simmons – Loss recognition on anthracite coal future contracts, capital or ordinary loss
As per ASC 450-20-25-2, an estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met:
On December 31 2007, your company determined that a loss in connection to the claim was probable.
The probability that liability will occur due to the litigation meets the definition of a loss contingency as stated in ASC 450. Hence:
50-3 Disclosure of the contingency shall be made if there is at least a reasonable possibility that a loss or an additional loss may have been incurred and either of the following conditions exists:
The loss portion of whole activities, which is 1.5 billion net loss. Inasmuch as workers’ compensation fund is 2 billion loss.
Speculative risk exists when there is uncertainty about an event that can produce either a profit or a loss.
3. Briefly state the facts of this case, using the information found in the case in
Definition: Losses from a business operation are limited to the amount of money you can actually lose in the business. You are subject to at-risk rules if you are filing Schedules C, E, or F.
* ASC 323-10-35: “A series of operating losses of an investee or other factors may indicate that a decrease in value of the investment has occurred that is other than temporary and that shall be recognized even though the decrease in value is in excess of what would otherwise be recognized by
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
25-7 If a loss cannot be accrued in the period when ti is probable that an asset had been impaired or a liability had been incurred because the amount of loss cannot be reasonable estimated, the loss shall be charged to the income of the period in which the loss can be reasonably estimated and shall not be charged retroactively to an earlier period. All estimated losses for loss contingencies shall be charged to income rather than charging some to income and others to retained earnings as prior period adjustments.”