M International Loss Contingency

964 Words4 Pages
Memo To: M International From: ------------------------------------------------- Re: Loss Contingency Recognition and Reversal Background The company has been engaged in a dispute over a long-standing litigation with W Inc. The dispute involves a specific patent infringement matter. In May 2007, W Inc. filed a claim against the company for patent infringement and management determined that a loss was probable and estimated it would be between $15 million and $20 million, with $17 million being the most likely amount of loss within the estimated range (December 31, 2007). In September 2009, a jury trial took place for the litigation involving the company and W Inc. A verdict for the trial was reached; a judgment was ordered that…show more content…
Issue 3 The case presents that the Court of Appeals overturned the $18.5 million judgment against the company, but W Inc. filed a petition for a re-hearing before the judges against the ruling of the reversal. “Resolution of the uncertainty may confirm any of the following: b. the reduction of a liability… d. The incurrence of a liability” says ASC 450-10-05-5. Also, ASC 450-30-25-1 shows that “A contingency that might result in a gain usually should not be reflected in the financial statements because to do so might be to recognize revenue before its realization.” This information shows that the company can record the reduction of the loss contingency in 2011, after the appellate judges reclined W Inc.’s rehearing because this is the resolution of uncertainty. Conclusion The probability that liability will occur due to the litigation meets the definition of a loss contingency as stated in ASC 450. Hence: 1. The company will recognize $17 million as the liability for the year ending December 31, 2007. 2. Yes, the company should adjust from the estimated amount to the actual amount, but not in prior periods. The adjustment will be in 2009. 3. The company will record the reversal of the liability in 2011, after the resolution of

More about M International Loss Contingency

Open Document