Client Request

Response to Client Request II

In this memo we will address the questions regarding your pending lawsuit and how it may affect your financial statements. In the event of losing the lawsuit, there is the potential for losing the mortgage. Several options may be available in this situation. We will look at these and the different outcomes. In addition, the patent may become impaired if the lawsuit is lost. If this is the case, we will clarify the reporting requirements. It is important that we follow the Generally Accepted Accounting Principles (GAAP) and reporting requirements set by the Financial Accounting Standards Board (FASB) in all situations.

Reporting Requirements for Contingencies

A contingency is a possible future event that will have some impact on the firm whether it is a gain or a loss. A pending lawsuit is considered one of the most common contingencies. The Financial Accounting Standards Boards (FASB) under the Statement of Financial Accounting Standards Number 5 discusses both the gain and loss contingencies. Based on the principle of disclosure, contingencies should be disclosed on the financial statements of the firm. A gain contingency is often not reported because this may distort the revenue because the gain has not been realized yet. On the other hand, loss contingencies are often reported based on certain criteria. If a potential obligation has a high probability of occurrence, it should be recorded as a liability. If the probability is low, then the information will be reported on the footnotes of the financial statements (Schroeder, Clark, M.W., & Cathey, J.M., 2011). A loss contingency is recorded on the books if the following conditions are met:

1. "Information available indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements" (Schroeder, 2011, Financial Accounting Theory and Analysis: Text and Cases, p. 363).

2. "The amount of the loss can be...