Lawsuit Memo Essay

The company should report the change in the contingency accrual as a 2009 event due change in estimate. ASC 250-10-45-17 specifies that “a change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods.” Additionally, ASC 450-20-25-7 indicates that “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”.

As ASC 450-20-25-2 states, 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 indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. Date of the financial statements means the end of the most recent accounting period for which financial statements are being presented. It is implicit in this condition that it must be probable that one or more future events

An accrual is not made for a loss contingency because any of the conditions in paragraph 450-20-25-2 are not met., b.  An exposure to loss exists in excess of the amount accrued pursuant to the provisions of paragraph 450-20-30-1.” Therefore, they also need to disclose the range of the possible loss with some explanation.

To properly understand the events a chronological descripcion of the litigation is to be provided.

The defendant, in my opinion, does not have a case, at all. Although, one ruling cited the timing of the filing as an issue and the company argued

2. Information available before the financial statements are issued or are available to be issued indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.

2 CFR 225 Appendix A (C) provides that to be allowable under an award, costs must be adequately documented

Accounting for the lawsuit is complicated at this stage because the company and/or the lawyer would be unwilling to admit in print (i.e., in the financial statements) that they would settle the lawsuit, and at what amount. This might provide too much information to the plaintiff that hurt company interests. Note disclosure of the lawsuit, in general terms, is the likely outcome, although an accrual for $150,000 would be made if the company were to share this information with its accountants. This is the ethically appropriate outcome. When the accrual is made, separate disclosure would be minimal so its treatment would not be obvious to the plaintiff.

And this is why, certain important things must be considered in case you are involved in litigation:

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

Presented are four separate cases that have been argued and settled in a court of law. Each of these cases represent a different kind of tort, a tort is a civil wrong or wrongful act, which can be either intentional or accidental, from which injury occurs to another (Hill & Hill n.d.). The torts are as listed, intentional, criminal, negligence, and liability as presented in the four researched cases.

Financial statement includes such as balance sheet, income statement and cash flow as well as related statement with them. The financial statement should contain all the formal data of the financial activities of business, person and other entity. Since there are over $10 million expense were only mentioned in prospectus but not in the financial statement, the Financial Report does not include a full set of financial statements.

General purpose financial statements provides information on the financial position of an entity. Thus it includes information on economic resources and claims against them.

To determine if a company has future uncertainties such as a lawsuit, there should be a review of notes to the financial statements. According to Schroeder, Clark, and Cathey (2009), “review the notes to financial statements to determine if loss contingencies exist that may reduce future earnings and cash flows” (p. 158).