ACCT 3367 Research Project
1. For the year-end December 31 2017, financial statement, what amount should M record as a liability?
In the year-end December 31,2017, the management of M determined that a loss will be probable, and the estimate of that loss was in the range of $15million to $20 million with $17 million being the most likely amount of loss within the range. Based on FASC 360-20-25-1 which states, “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 remote.” Knowing this loss is probable proves that it should be accrued for, based on FASC 360-20-25-2 which states, “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 (as discussed in Section 855-10-25) 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.” We know both of these conditions are met because the date of the financial statement means the end of an accounting period (December 31) for which the financial statement has been presented and from the question it was said that the matter was probable, also the amount of loss can be reasonably estimated so M would record liability as $17 million because it is the most likely amount of loss in the range of amount that was estimated.
2. For the year-end December 31,2019, financial statements, should M adjust its liability? If so what amount should be recorded and should the amount of the adjustment be considered a 2019 event or a prior period adjustment?
M should adjust its liability because at September 24 2019 the judgement was ordered for them to pay W 18.5 million which is $1.5 million more in liability than it was December 31, 2017, and since a notice of appeal was filed in November 2019 it has caused it to become a contingent liability by December 2019 since there I still a contingency loss. Based on FASC 450-20-25-3 it is stated that,” The conditions in the preceding paragraph are not intended to be so rigid that they require virtual certainty before a loss is accrued. Instead, the condition in (a) in the preceding paragraph is intended to proscribe accrual of losses that relate to future periods.” Which is basically saying that since the situation falls into all the conditions that are to be met to estimate loss from a loss contingency. M should adjust its liability by an additional $1.5 million to make it $18.5 million, such even should be considered a 2019 event since the events affecting the price occurred in 2019 and not before the year end December 21 2017. Based on FASC 450-20-25-6-7 which states,” After the date of an entity's financial statements but before those financial statements are issued or are available to be issued (as discussed in Section 855-10-25), information may become available indicating that an asset was impaired or a liability was incurred after the date of the financial statements or that there is at least a reasonable possibility that an asset was impaired or a liability was incurred after that date. The information may relate to a loss contingency that existed at the date of the financial statements, for example, an asset that was not insured at the date of the financial statements. On the other hand, the information may relate to a loss contingency that did not exist at the date of the financial statements, for example, threat of expropriation of assets after the date of the financial statements or the filing for bankruptcy by an entity whose debt was guaranteed after the date of the financial statements. In none of the cases cited in this paragraph was an asset impaired or a liability incurred at the date of the financial statements, and the condition for accrual in paragraph 450-20-25-2(a) is, therefore, not met. If a loss cannot be accrued in the period when it is probable that an asset had been impaired, or a liability had been incurred because the amount of loss cannot be reasonably estimated, the loss shall be charged to the income of the period in which the loss can be reasonably estimated and shall not be charged retroactively to an earlier period. All estimated losses for loss contingencies shall be charged to income rather than charging some to income and others to retained earnings as prior period adjustments.”
3. For the year-end December 31, 2020, financial statements, what amount should M record as a liability?
M should not record anything for liability, in fact all transactions must be reversed due to the fact that the ruling went in favor of M and it reversed the lower court’s ruling meaning the $18.5 million will also be reversed. Based on FASC 450-20-25-5 which states,”That requirement shall not delay accrual of a loss until only a single amount can be reasonably estimated. To the contrary, when the condition in paragraph 450-20-25-2(a) is met and information available indicates that the estimated amount of loss is within a range of amounts, it follows that some amount of loss has occurred and can be reasonably estimated. Thus, when the condition in paragraph 450-20-25-2(a) is met with respect to a particular loss contingency and the reasonable estimate of the loss is a range, the condition in paragraph 450-20-25-2(b) is met and an amount shall be accrued for the loss.” The situation does not meet all the conditions for loss contingency anymore so therefore to reverse such transactions you need to credit the $18.5 million to retained earnings and debit the $18.5 million to litigation liability
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