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In: Accounting

Case 13- 08 Accounting for a Loss Contingency for a Verdict Overturned on Appeal M International...

Case 13- 08 Accounting for a Loss Contingency for a Verdict Overturned on Appeal M International (“M”) and W Inc. ( “W,” a competitor of M) have been engaged in long- standing litigation over a specific patent infringement matter . Below is a summary timeline of specific events that have taken place related to this matter : • In May 2007, W filed a claim against M for patent infringement . • For the year ended December 31, 2007, management of M determined th at a loss for this matter was probable and represented t hat the estimate of loss was in the range of $1 5 million to $20 million , with $17 million being the most likely amount of loss within the range. • A jury trial took place in September 2009. • The jury reached a verdict on September 24, 2009, and a judgment was ordered in favor of W . The judgment required M to pay W $18.5 million . • In November 2009, M filed a Notice of Appeal with the Court of Appeals . • In December 2010, the Court of Appeals issued a ruling in favor of M’s appeal and reversed the lower court ’s ruling on the matter. This meant that the Court of Appeals overturned the jury verdict and the $18.5 million judgment against M . • On January 6, 2011, W filed a petition for a re -hearing before the same panel of appellate judges against the reversal of r uling by Court of Appeals . • On February 10, 2011, the appellate judges declined the petition for a re -hearing . • On February 28, 2011, management of M determined this matter was closed upon discussions with in- house legal counsel.

PLEASE PROVIDE ONE PAGE SUMMARY OF THE CASE

Solutions

Expert Solution

1. According to the case, it shows that management of M determined that a loss would be “probable” and the estimate range would be $15 million to $20 million. However, they determined $17 million would be the “most likely” amount of loss. According to ASC 450-20-25-1, “When a loss contingency exists, the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability can range from probable to remote. As indicated in the definition of contingency, the term loss is used for convenience to include many charges against income that are commonly referred to as expenses and others that are commonly referred to as losses. The Contingencies Topic uses the terms probable, reasonably possible, and remote to identify three areas within that range.” Moreover, ASC 450-20-25-2 shows that “An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met: a.  Information available before the financial statements are issued or are available to be issued indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. Date of the financial statements means the end of the most recent accounting period for which financial statements are being presented. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss. b.  The amount of loss can be reasonably estimated.”

Therefore, they should disclose the most likely amount of loss which is $17 million as a liability. Furthermore, they also need to disclose “a.  The nature of the contingency, b.  An estimate of the possible loss or range of loss or a statement that such an estimate cannot be made” as ASC 450-20-50-4 mentioned.


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