<Accounting for a Loss Contingency for a Verdict Overturned on Appeal> M Interna

Question

<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 that a loss for this matter was probable and represented that the estimate of loss was in the range of $15 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 ruling 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.

Required:

1. For the year-end December 31, 2007, financial statements, what amount should M record as a liability?

2. For the year-end December 31, 2009, financial statements, should M adjust its liability? If so, what amount should be recorded; and should the amount of the adjustment be considered a 2009 event or a prior period adjustment?

3. Should M record the reduction of the previously recorded loss contingency in 2010 (upon the Court of Appeals overturning the verdict of the jury) or 2011 (once the appellate judges declined W’s petition for a re-hearing)? What is the answer in context of FASB ASC?

Explanation / Answer

1. For the year end Dec31. 2007 Financial statement M should record a liability for the best estimate fo $ 17 million as the loss was probable and the most like ly amount was $17 million.

2. For the year-end Dec31. 2009 M should adjust the liability . Additional liability of $1.5 miilion is to be recorded. It is a change of estimate , so it should be a 2009 event , not a prior period adjustment.

3. From the point of conservatism, M should reduce the recorded loss contingency in 2011 when the appellate judges declined w's petition of re-hearing. In 2010 though the apellate ruled in favor of M, there is always the probability of re-appeal and re-hearing. Unless the probability of reversal of judgment in favor of M is established and the probability of contingent loss becomes remote the loss contingency should not be reduced or reversed.

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.