Question

On “Bring Your Children to Work Day” at Wing Corporation, Susan Gills, a Wing employee, brought her ten-year-old daughter to work. ACE was installing Wing’s new computer system on that day. After installation, when Susan attempted to adjust the monitor connected to her new computer, she inadvertently knocked the monitor off the desk and onto the floor. The screen shattered causing a shard of glass to strike the child’s toe resulting in four stitches. Susan has blamed the installer, ACE, for placing the monitor in a dangerous position near the back edge of her desk. The damages to this point have been minimal as Susan drove her child to their physician and paid the $20 copay for an office visit. Yet, the Gills family has sued ACE for the following:

Likely future plastic surgery $ 5,000 Emotional distress to Child 500,000 Emotional distress to Susan 1,200,000 Total $1,705,000

ACE’s lawyers believe that this case, with the possible exception of the plastic surgery (for which the HMO won’t pay), is frivolous. ACE has no insurance to cover this sort of liability. If this case goes to court, ACE’s on staff attorneys will handle the case. To eliminate any possible bad press from this case, ACE’s lawyers suggested settling for a “nuisance value” of $10,000. The family rejected this offer out of hand and asked for $200,000 to settle this out of court. ACE has decided, at least at this point, to refuse any further settlement offer.

In the lawyer’s letter to you, ACE’s lawyers indicated that they believe that ACE has “just and meritorious defense available” to fight this case. Furthermore, ACE’s legal counsel for the case indicated that while she agrees that this case is largely frivolous, litigation involving a young child is somewhat of a gamble and that making a definite prediction on the outcome of the case is impossible. In the end she believes the judgment will likely be $5,000 for the plastic surgery. What entry or disclosure, if any, is necessary in this circumstance?   

Also what standard would go along with this?

Answer 1

Disclosure: In this circumstance, there shall be a disclosure of contingent liability for the amount of $5,000. If possible, a potential timing shall also be disclosed.

Relevant Standard: ASC 450 - Contingencies under the U.S. GAAP, or IAS 37 - Provisions, Contingent Liabilities and Contingent Assets under IFRS.

Justifications: A contingent liability includes a possible obligation depending on whether some uncertain future event occurs. In the given case, although a case has not been filed, there is virtual certainty that a litigation will materialize. This is indicative of a 'possible obligation'. ASC 450 directs that the most likely amount shall be disclosed, and if no amount is more likely than the other, then the lowest amount in the range of amounts shall be disclosed, which, in this case measures up to the sum of $5,000 being the most likely liability.

Note: I hope this is sufficient. Feel free to comment and ask for clarifications and details if required. If this helps, kindly leave a thumbs up.