Question

Problem C, Contingencies Z Corp. filed a claim for patent infringement against M Corp. in October 2020. In preparing its financial statements for the year ending December 31, 2020, M Corp. financial accounting group obtained the following information related to this claim:

• M Corp’s Risk Management Department believes that M will incur a loss from this lawsuit. They estimate the loss will be in a range from $15 million to $20 million, but cannot give a more precise estimate.

• The trial will likely not take place for two years, in 2022 or 2023.

• M Corp’s CFO insists that the company will fight this claim “until the end of time.” Based on that, the CFO maintains that no loss need be recorded because none will be incurred … ever!

• M Corp’s legal department believes the case will be resolved within four years, if appeals are necessary. They agree with Risk Management’s assessment.

Your Assignment Assume that you are the Controller of M Corp (you are the top accounting officer and report directly to the CFO). What do you say to the CFO about this matter? You must resolve this issue now so that financial statements can be prepared. You can literally write what you would say, or you can do it in the form of a brief message. But you must state your opinion on how this should be handled (not forgetting that your boss thinks nothing needs to be done). And it must be brief (the CFO does not like to read long messages … get to the point!)

Answer 1

sol:

In the given scenario, a loss contingency could also be incurred by the entity supported the end result legal proceeding.Loss contingencies ought to be rumored forthwith as long as they're probable and may be moderately calculable.

The Risk Management Department believes that M business firm. can incur a loss from the proceeding, and M business firm doesn't dispute Risk Management's assessment. Therefore, the loss is probable.

The Risk Management Department estimates the loss are going to be in a very vary from $15 million to $20 million, however cannot provides a additional precise estimate. Therefore, the loss can't be moderately calculable. Furtther, four years may be a very long time.

As the loss is probable, however can't be moderately calculable, it will neither be recognized as a loss on the earnings report nor rumored as a liability on the record as at December 31, 2020. however a speech act has to be created on the contingency on the notes to accounts.

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