Harrington Company was sued by an employee in late 2017. General counsel conclud

Question

Harrington Company was sued by an employee in late 2017. General counsel concluded that there was an 60 percent probability that the company would lose the lawsuit. The range of possible loss is estimated to be $21,000 to $70,000, with no amount in the range more likely than any other. The lawsuit was settled in 2018, with Harrington making a payment of $58,000.

Assume that a U.S.–based company is issuing securities to foreign investors who require financial statements prepared in accordance with IFRS. Thus, adjustments to convert from U.S. GAAP to IFRS must be made. Ignore income taxes.

Required:

Prepare journal entries for this lawsuit for the years ending December 31, 2017, and December 31, 2018, under (1) U.S. GAAP and (2) IFRS.

Prepare the entry(ies) that Harrington would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert U.S. GAAP balances to IFRS.

Explanation / Answer

US GAAP and IFRS record a contingency loss when the loss is deemed to be probable. This definition of probable differs between the two groups. US GAAP defines probable as “likely”, whereas IFRS defines probable as “more likely than not”. The result is that IFRS is more conservative in recognizing contingency losses. In this situation, the loss is recorded for IFRS only, with a corresponding liability on the balance Sheet. US GAAP only requires disclosure in this situation US GAAP Dec 31, 2017 Since chances are only 60%, it will be shown in the notes to accounts but no accounting adjustment needed Dec 31, 2018 Loss from Lawsuit 58000 Cash 58000 IFRS Dec 31, 2017 Profit and loss account 21000 Provision from Law Suit 21000 Dec 31, 2018 Provision from Law Suit 21000 Additional Loss from Lawsuit 37000 Cash 58000 Reconcilliation Dec 31, 2017 Contingency loss - Income Statement 21000 Contingency Liability payable 21000

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