In: Accounting
A lawsuit has been filed against XYZ Company. As year-end, the company’s attorney believes that there is an 85% likelihood that the company will be found liable. The attorney believes that the estimated range of the liability is between $50,000 and $150,000 and that all amounts within the range are equally likely. In addition, the company has announced a restructuring plan prior to year-end that has created a valid expectation on the part of the employees to be terminated with an estimated liability of $500,000. As of year-end, there is currently no legal obligation to make any payments to the terminated employees. Lastly, the Company issued stock options with a fair value of $200,000 on January 1st with a 2 year vesting schedule.
Answer 1) For Law suit where attorney believes that 85% likelihood that company will be found liable and liability ranges between $ 50,000 and $1,50,000
Under IFRS provision is Recognized when all of the following criteria are met:
In the given question A legal claim might be settled between $50,000 and $1,50,000, with all outcomes within therange being equally possible.-Mid point of Range i.e.( 50,000+150,000)/2 = 1,00,000 . Therefore provision for $ 1,00,000 is made under IFRS.
Under US GAAP loss contigency is recognized when all of the following criteria are met:
Here contigency liability is recognized for lower end of amount i.e. $ 50,000.
Answer 2: Restructuring
Under IFRS:
AS 37 explains that a constructive obligation for a restructuring arises only when:
Therefor under IFRS a provision for restructing cost is required to be recognized since above conditions are satisfied.
Under GAAP :
Restructuring liability is only rcoginized if it represents a present oblogation. An entity commitment to exit plan or disposal plan is required to recognize a restructuring liability .A liability for contract termination cost is recognized ony when the contract has been terminated pursuant to its terms or the entity has permanently ceased. Restructuring liability is measured at the fairvalue.
Threfore under US GAAP recognization will be made at fair alue when event will occured.