Acc 541 Response to Client Request

Response to Client Request

ACC 541

Response to Client Request

Potential lawsuits are detrimental to a company’s image and potential losses. The importance of a company’s understanding of risk reduction is detrimental to finding the cause of the risk and to minimizing them in the future. Our client requests guidance on the following questions related to a lawsuit and contingency reporting:

* What are the requirements for reporting contingencies and what would happen to the financial statements if the client loses the lawsuit?

* Will the debt be forgiven, if the mortgage is rewritten, or if the mortgage will be rewritten if filing Chapter 11? How will the reporting on the financial statement be determined?

* How does the impairment of the patent in the event of losing a lawsuit be reflected on the financial statements?

The client’s concern is how the reporting of contingencies effects the financial statements if the company loses the lawsuit. “Most companies have at some time had to grapple with the question of whether or not to accrue and/or disclose loss contingencies” (Forsyth, 1995). Based the findings through research of the FASB rulings, an analysis of potential outcomes is provided.

Reporting Requirements for Contingencies

The requirements established for reporting loss contingencies require that the likelihood of loss be determined as follows:

• Probable. The future event is likely to occur.

• Reasonably possible. The chance of occurrence is more than remote but less than likely.

• Remote. The chance of occurrence is slight.

Once the likelihood of a loss is determined, contingencies are charged against income and a liability is recorded if both of the following conditions are met:

1. Information available before the issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements.

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