Contingent Loss Memo

In: Business and Management

Submitted By tattooedgroove
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Memo To: | Lead Accountant, Martin Co. | From: | Michael Shaneyfelt | Date: | December 31, 2013 | Re: | Contingent Loss for Campbell Co. Lawsuit (Requirement 1) | | |

In response to your request for accounting guidance regarding the judgment issued in the Campbell v. Martin lawsuit, we have come to the following conclusion:

We recommend Martin adjust the $18 million loss contingency recorded in 2011 to $19 million in the current period.

This recommendation is in line with FASB guidance on accounting for contingencies as detailed in the Accounting Standards Codification.

FACTS
These are the facts as we understand them. In 2011 Martin’s management accrued a loss of $18 million based on an estimated range of $16 million to $20 million. A judgment was ordered in September 2013 requiring Martin to pay Campbell $19 million for patent infringement. Martin immediately filed a Notice of Appeal with the Court of Appeals.

ISSUE
What amount should be adjusted for the liability recorded in 2011and should the adjustment be considered a 2013 event or prior period adjustment?

CONCLUSION
We recommend Martin adjust the $18 million loss contingency recorded in 2011 to $19 million in the current period. An example of the journal entry would be:

Loss on Contingent Lawsuit $1 million Estimated Liability for Contingent Loss $1 million

DISCUSSION
This event meets both conditions of ASC 450-20-25-2, which require recognition of a loss contingency. First, ASC 450-20-25-2(a) requires that information available before the date of the financial statements indicates the probably impairment of an asset or that a liability has been incurred at the date of the financial statements. ASC 450-20-25-2(b) then demands that the amount of the loss can be reasonably estimated.

The judgment against Martin ordering the company to pay $19 million is more than…...

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