Question

A legal battle for rights owned under OxyCleaners Inc. is likely to be won for $5 million dollars according to a third party legal team. This company is traded on the TSX, and is preparing the financial statements. The legal proceedings are to occur in the next financial period. You, Oxy's new controller, have just received this information. What impact do they have on financials?  

Answer 1

The above legal suit can be treated as a Contingent Asset.

A contingent asset is a potential economic benefit that is dependent on future events upon a company's control.

Not knowing for certain whether these gains will materialize or being able to determine their precise economic value, means these assets cannot be recorded on the balance sheet.

However, they can be recorded in their accompanying notes of Financial statement, provided that certain conditions are met.

In the above scenario Company Oxycleaners Inc. is likely to be won for $5 million according to a third party legal team. This is clear indication for recognising it as a contingent asset.

Generally Accepted Accounting Principles (GAAP) requires a note disclosure in any Contingent Asset.

Me as a controller of Oxycleaners Inc. will disclose the legal suit as a contingent Asset of value $ 5 million through a note Disclosure in Financial Statements as per GAAP.