The following are a selection of circumstances relating to various different lit
ID: 2514719 • Letter: T
Question
The following are a selection of circumstances relating to various different litigation involving Cooper Inc., a US-based company that reports in US GAAP. Cooper's fiscal year end is December 31, 2018 and it will 2018 financial statements will be issued in March 2019 (when Cooper files is 2018 10-K with the SEC). In your answer, describe how Cooper would need to account for each scenario. This includes recognizing (Dr/Cr) and expense/liability that needs to be recorded, or disclose the information in a footnote. 1) Cooper is defending against a lawsuit. Cooper's management believes the company has abut a 50/50 change of losing the case. If Cooper loses the case, the judgement against Cooper will be $1,000,000. 2) Cooper is defending against a lawsuit. Cooper's management believes it is probably the company will lose in court. Management estimates that the damages could fall in the range of $2,000,000 to $4,000,000. Damages in this range are equally likely. 3) Cooper is defending against a lawsuit. Cooper's management believes it is probably the company will lose in court. If it loses in court, Cooper estimates that the loss will be $4,000,000, but since the award will be paid many years in the future, the present value is $3,200,000. 4) Cooper is a plaintiff in a lawsuit. Management believes that it is probably that Cooper will prevail in court, and that if it prevails, the aware will be $1,500,000. 5) Cooper is a plaintiff in a lawsuit. Management believes that it is virtually certain that the company will prevail in court, and when it prevails, the aware will be $3,000,000.Explanation / Answer
Contingent Liabilities & Provisions
US GAAP precisely deals with contingency & provisions are 410,420 & 450
The Master Glossary of the ASC defines a contingency as follows: “An existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an entity that will ultimately be resolved when one or more future events occur or fail to occur.”
Further, following conditions have been laid down for requirements of making Provisions :
(a) an enterprise has a present obligation as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
Answers to Given Case
1) In this case, Cooper will show it as an Contingent liability as Foot note to the Financial Statements as it did not fulfill the two conditions for provisioning which are – it has no present obligation and probability is equally likely.
2) In this case, Cooper will show it as an Contingent liability as Foot note to the Financial Statements as it did not fulfill the two conditions for provisioning which are – it has no present obligation and there is no reliable estimation and measurement of damage amount. Amount for provisioning should be reliably measured.
3) In this case, Copper limited will recognize the expense as Provision to current year financial statement as it has fulfilled all 3 conditions for provisioning as per US GAAP.
Under U.S. GAAP, ASC 410-20-25-4 requires that an entity recognize an ARO at fair value in the period in which the liability is incurred if the ARO's fair value can be reasonably estimated. If its fair value cannot be reasonably estimated, the ARO should be recognized when a reasonable estimate of fair value can be made. Under ASC 810-10, the fair value measurement of a liability assumes that a transfer of the liability to a market participant has occurred as of the measurement date, with the liability continuing as an obligation of the counterparty and the nonperformance risk of the liability unchanged with the transfer
Under U.S. GAAP, ASC 410-20-25-4 requires that an entity recognize an Provision (ARO) at fair value in the period in which the liability is incurred if the ARO's fair value can be reasonably estimated. If its fair value cannot be reasonably estimated, the ARO should be recognized when a reasonable estimate of fair value can be made. Under ASC 810-10, the fair value measurement of a liability assumes that a transfer of the liability to a market participant has occurred as of the measurement date, with the liability continuing as an obligation of the counterparty and the nonperformance risk of the liability unchanged with the transfer.
Journal Entry will be
Profit and Loss A/c Dr $3,200,000
To Provision for Lawsuit $ 3,200,000
(assuming discounting for fair value has been done on risk free adjusted rate)
Contingent Assets
A contingent asset is a possible asset that may arise because of a gain that is contingent on future events that are not under an entity's control. According to the accounting standards, a business does not recognize a contingent asset even if the associated contingent gain is probable.
A contingent asset becomes a realized (and therefore recordable) asset when the realization of income associated with it is virtually certain. In this case, recognize the asset in the period when the change occurs. This treatment of a contingent asset is not consistent with the treatment of a contingent liability, which should be recorded when it is probable (thereby preserving the conservative nature of the financial statements).
4) As per the rules cited above for Contingent asset, Cooper will not recognize the contingent asset in Financial statements. Neither any recognition to profit and loss account will be done nor any footnote disclosure will be made to financials.
However, if management wants to inform the stakeholders about it then they can include it in their Board report.
5) As per the rules cited above for Contingent asset, Cooper will not recognize the contingent asset in Financial statements. But as mentioned it is virtually certain to receive the aware, recognition to Financials will be made in the year when final decision will come. Following Journal Entry will be passed in that year:
Lawsuit Aware Income A/c Dr $ 3,000,000
To Profit and Loss A/c $ 3,000,000
However for current year (till final decision not come), if management wants to inform the stakeholders about it then they can include it in their Board report.
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