Quandary Corporation has a major customer who is alleging a significant product defect. Quandary engineers and attorneys have analyzed the claim and have concluded that there is a 51% chance that the customer would be successful in court and that a successful claim would result in a range of damages from $10 million to $20 million, with each part of the range equally likely to occur. The damages would need to be paid soon enough that time-value-of-money considerations are not material. Would a liability be accrued under U.S. GAAP? Under IFRS? If a liability were accrued, what amount would be accrued under U.S. GAAP? Under IFRS?

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Asked Feb 2, 2020
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Quandary Corporation has a major customer who is alleging a significant product defect. Quandary engineers and attorneys have analyzed the claim and have concluded that there is a 51% chance that the customer would be successful in court and that a successful claim would result in a range of damages from $10 million to $20 million, with each part of the range equally likely to occur. The damages would need to be paid soon enough that time-value-of-money considerations are not material. Would a liability be accrued under U.S. GAAP? Under IFRS? If a liability were accrued, what amount would be accrued under U.S. GAAP? Under IFRS?

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Expert Answer

Step 1

Accrual of liability under US GAAP:

Under US GAAP accrual liability is defined as probable as likely this has been generally interpreted as greater than 70% chance of occurring.

Accrual of Q Corporation’s liability under US GAAP:

Since the chances of occurrence of alleging product defect suggested by Q Corporation are 51% which is less than 70% as prescribed % of US GAAP. Therefore, loss contingency is not probable.

Step 2

Accrual of liability under IFRS:

Under IFRS accrual liability is defined as probable event which are more likely than not i.e. more than 50% chance of occurring.

Accrual of Q Corporation’s liability under IFRS:

Since the chances of occurrence of alleging product defect suggested by Q Corporation are 51% which are higher than the prescribed % of IFRS. Therefore, loss contingency is probable.

Step 3

Accrual of loss contingency for range of equally likely losses under US GAAP:

When there is a continuous range of possible outcomes and each point in ...

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