Z Co. filed suit against W Inc. in 2021 seeking damages for patent infringement. At December...

Z Co. filed suit against W Inc. in 2021 seeking damages for patent infringement. At December 31, 2021, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2022. Z should report this award in its 2021 financial statements, issued in March 2022?

Expert Solution

Contingent Asset : Contingent asset is defined as possible asset that arises from past events, the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events, which are not wholly within the control of the entity.

Treatment of contingent assets in financial statements : Contingent assets are recognized only when it becomes reasonably certain that inflow of economic benefit will arise. Till then, it is mentioned as a disclosure in the notes to financial statements.

Subsequent events : Subsequent events are those events that occur before the financial statements are issued. These events occur after the reporting period & validate those events or acts that are in existence during the reporting period.

Given Case : In the given case, Z. Co has an pending law suit for patent infringement against W. Inc. The legal counsel of Z company believes that the end result of the suit will be favorable to them and a probable estimate of $30-$60 million could be recovered as damages.

Treatment : Even though it is probable that the company will win the monetary reward, the suit being a contingent asset cannot be recognized until it the same is settled. The event cannot be treated as subsequent event because, the settlement occurs only after the "issuance of financial statements".

Therefore, for the year ending in December 2021, the company shall disclose the suit as a "Contingent asset" with a statement that the company is expecting a win situation with a monetary reward ranging between $30-$60 million.

ekkarill92 answered 2 years ago

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