Accounting for a Loss Contingency for a Verdict Overturned on Appeal - Assignment Example

The jury trial of September 2009 led to the award of $18.5 million to W based on the verdict reached. M Company filed for appeal on December 2009 in the Court of Appeal, which reversed the ruling on the matter on December 2010. W filed for a rehearing of the case by the same appellate court that overturned the verdict but was denied and hence M considering the matter closed. Issues: The company needs to identify what to record as a liability in its financial statements for the year ending December 31, 2007.

Is there a need for M to adjust its liability for the year ending December 31, 2009? What amount is recorded and for which year? Should the effect of the appeal take place in 2010 or 2011 in the records of M and their financial statements?GuidanceASC 450-10, Contingencies OverallAccording to the contingencies 450-10, 05-5, a resolution of uncertainty involving the incurrence of a liability or an occurrence that includes inherent uncertainties provides contingencies. Through this, the standards for recording contingencies are developed in accounting and financial reporting.

ASC 855, Subsequent Events, Recognized Subsequent events in the recognition of subsequent events, consideration of all available evidence on the conditions existing in the year for the date that the balance sheet covers prove reasonable and necessary. According to 25-1 of the same, a company shall recognize or provide for all recognized subsequent events provided the availability of additional evidence in their financial statements considering the availability of this information during the date of the balance sheet or the development of the financial statements.

ASC 410-30 Asset Retirement and Environmental obligations In cases where a probability exists weighing on which a liability has been incurred provide for the reasonable estimation of the liability. 25-8 provides for the creation of the recognition of a loss contingency once the range in which the loss falls is probable for estimation (Accounting Standards Codification, n.d). In the same context, the retirement of an asset proves possible once the uncertainties provided become certain, and the company comprehends the effect caused in totality.

ApplicationDuring the development of the financial statements of December 31, 2007, the company needed to provide for the uncertainty in its records, and based on the estimate developed, it proved necessary to include the rough estimate of $ 17 million in the financials aa s liability. During the year 2009, the record of the liability stated as $17 million needed amending since the ruling had been made on the case providing for $18 million despite the appeal holding. In 2010, W filed for appeal against the ruling of the court of appeal on the matter.

This leaves uncertainty still surrounding the matter and hence the need to continue holding the liability stated in the books. According to the ASC 410-30 dealing with asset retirement, it is only recognized once fully ascertained which ascertainment occurred in 2011 after W lost the appeal. It is, therefore, prudent for the effect of the appeal to occur in 2011 in the financials of M.