ACCOUNTING STANDARDS CASE 2—INTERIM REPORTING
Caplan Pharma, Inc., recently was sued by a competitor for possible infringement of the competitor’s patent on a top-selling flu vaccine. The plaintiff is suing for damages of $15 million. Caplan’s CFO has discussed the case with legal counsel, who believes it is possible that Caplan will not be able to successfully defend the lawsuit. The CFO knows that current U.S. accounting guidelines require that contingencies (such as lawsuits) must be disclosed in the annual report when a loss is possible. However, she is unsure whether this rule must be applied in the preparation of interim financial statements. She also knows that disclosure is necessary only if the amount is material, but she is unsure whether materiality should be assessed in relation to results for the interim period or for the entire year.
Required
Search current U.S. accounting standards to determine whether contingencies are required to be disclosed in interim reports, and, if so, how materiality is to be determined. Identify the source of guidance for answering these questions.
Want to see the full answer?
Check out a sample textbook solutionChapter 8 Solutions
ADV. ACCT CONNECT STAND ALONE
- ACCC takes Harvey Norman franchisees to courtABC Updated November 21, 2012, 8:51 amThe competition watchdog is taking 11 Harvey Norman franchisees to the Federal Court for allegedly misrepresenting consumer rights.The ACCC alleges the franchisees of the stores misled and deceived customers by making false claims about warranties and refunds.As part of the action, the ACCC is seeking penalties, declarations, injunctions and costs.It is part of the commission's campaign on consumer guarantees and it says it is investigating other large companies for similar breaches.ACCC chairman Rod Sims said in a statement that consumers had the right to certain remedies when goods were not of acceptable quality or fit for the purpose for which they were sold."These rights cannot be excluded, restricted or modified," he said."For example, if an item purchased breaks down within a short time of being purchased, the consumer may be entitled to a refund or a replacement item."The ACCC says in some cases…arrow_forwardMicrosoft Corporation is the defendant in numerous lawsuits claiming unfair tradepractices. Microsoft has strong incentives not to disclose these contingent liabilities. However,U.S. GAAP requires that companies report their contingent liabilities.Requirements1. Why would a company prefer not to disclose its contingent liabilities?2. Identify the parties involved in the decision and the potential consequences to each.3. Analyze the issue of whether to report contingent liabilities from lawsuits from thefollowing standpoints:a. Economicb. Legalc. Ethical4. What impact could future changes in accounting standards, both at the U.S. level and theinternational level, likely have on the issue of disclosure of loss contingencies?arrow_forwardAssume that a U.S.-based company is issuing securities to foreign investors who require financial statements prepared in accordance with IFRS. Thus, adjustments to convert from U.S. GAAP to IFRS must be made. Ignore income taxes for given problem. Harrington Company was sued by an employee in late 2017. General counsel concluded that there was an 80 percent probability that the company would lose the lawsuit. The range of possible loss is estimated to be $20,000 to $70,000, with no amount in the range more likely than any other. The lawsuit was settled in 2018, with Harrington making a payment of $60,000.a. Determine the appropriate accounting for this lawsuit for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS.b. Prepare the entry(ies) that Harrington would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert U.S. GAAP balances to IFRS.arrow_forward
- 1 In November 2019, Manly Ltd, a manufacturer of heating systems, was taken to court by one of its competitors, Heating Ltd, under the Competition and Consumer Act 2010(Cth). Heating alleged that Manly sought to enter into exclusive agreements with several retailers that they would only stock Manley’s products. While manly incurred $240000 in legal costs in defending the action, the case was settled out of court. The terms of the agreement on 20 February 2020 provided that Manly would pay Heating $$500,000 immediately, and an amount equal to 3% of profits over the next two years. For 2018/2019 the profit was estimated to be $660,000 and the year after $780,000. Advise Manly on the deductibility of this expenditure. Make sure you include the relevant sections of the legislationarrow_forward1. On March 2015, Agency A is taking legal action against its competitor for patent infringement relating to a patent that had been granted to the agency on one of its products. The outcome of the case is uncertain. However, it is probable that the court will order the competitor to pay damages to the entity. 2. Use facts given in No. 1, but assumes that on June 2015 the Chief Legal Counsel of Agency A informs the management that it is now virtually certain that the court will order the competitor to pay damages to the entity. 3. Continuation of facts given in No. 2, this time assumes only that on July 2015 the management learns that it becomes probable that the court will rule in favor of the competitor. State whether a contingent liability or contingent asset exists. Explain your answers by stating the criteria of your answers below.arrow_forwardTweedy Inc. prepares its financial statements according to International Accounting Standards (IFRS). It recently estimated that it has a 99 percent chance of winning a lawsuit. Assuming Tweedy can reliably estimate the amount it would receive if it wins the lawsuit, it should. a. Accrue an asset for the lawsuit. b. Disclose the matter in the notes to the financial statements but not accrue an asset for the lawsuit. c. Make no mention of the lawsuit in the financial statements or notes. d. None of the above.arrow_forward
- Cline Inc. prepares its financial statements according to International Accounting Standards (IFRS). It recently concluded that it will lose a lawsuit, and that it will pay a range of damages falling somewhere between $10 million and $20 million. Cline should accrue a liability in the amount of. a. $0, as no specific amount is probable to be incurred. b. $10 million, the lower end of the range of probable amounts. c. $15 million, the expected value of the amount to be paid. d. $20 million, the upper end of the range of probable amounts.arrow_forwardA lawsuit has been filed against Sunland Company for wrongful termination. Sunland's legal counsel had encouraged the company to settle because it is likely they will lose the case. The amount of the loss is estimated to be between $573000 and $1062000. Legal counsel believes that the case could be settled for $864000. Sunland should report O a contingent liability for $864000. O an estimated liability for $573000. O a contingent loss of $1062000. O no loss or liability until the case is settled. Attempts: 0 of 1 used Submit Answerarrow_forwardQ.1.3 During the previous financial year, a competitor began litigation against Isomin Ltd (4) regarding a dispute over a design. On 10 April 2021, a judge decided that Isomin Ltd should pay the competitor R45 000 without leave to appeal. Isomin Ltd had treated this matter as a contingent liability in the 31 March 2020 financials.arrow_forward
- Which statement is most TRUE regarding Corporate Social Responsibility (CSR) Reporting as of April, 2022? [Most choices are blatantly, outrageously false. This is a fluid area so next year the answer may be different] a. In the U.S., the PCAOB exercises responsibility for setting CSR standards. b. There are no requirements for CSR Reporting for publicly-traded U.S. companies c. In the U.S., the SEC has delegated standard-setting for CSR to the AICPA. d. The FASB has agreed to endorse the use of IASB standards, by U.S. companies, for their CSR reportsarrow_forwardProblem 1 On March 1, 2019, a suit was filed against ABC Company for patent infringement. ABC's legal counsel believed an unfavorable outcome is probable and estimated that the entity will have to pay between P850,000 and P900,000 in damages. However, ABC's legal counsel is of the opinion that P600,000 is a better estimate than any other amount in the range. The situation was unchanged when December 31, 2019 financial statements were released on February 15,2020. What amount should be accrued as liability on December 31, 2019 in connection with this law suit? Problem 2 On February 5, 2020, an employee filed a P2,000,000 lawsuit against XYZ Company for damages suffered when plant of the entity exploded on December 29, 2019. The entity's legal counsel believed the entity will probably lose the lawsuit and estimated the loss to be P500,000. The employee has offered to settle the lawsuit out of court for P900,000 but the entity will not agree to the settlement. On December 31, 2019, what…arrow_forwardWashington D.C., August 15, 2017 — The Securities and Exchange Commission announced today that KPMG has agreed to pay more than $6.2 million to settle allegations that it failed to properly audit the financial statements of oil and gas companies, resulting in investors being misinformed about the value of energy companies. The KPMG engagement partner in charge of the audit also agreed to settle the claim against him. According to an SEC order, KPMG was hired as an outside auditor for Miller Energy Resources in 2011 and issued an unqualified audit report despite the grossly overstated value of major oil and gas assets. KPMG and engagement partner John Riordan failed to properly assess the risks associated with accepting Miller Energy as a client and did not perform the audit properly, which overlooked an over-assessment of certain oil and gas interests the company had purchased in Alaska the previous year. Among other audit failures, KPMG and Riordan did not adequately consider and…arrow_forward
- Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning