Respond to Client Request

In: Business and Management

Submitted By Andrew2009
Words 1281
Pages 6
Response to Client Request II
ACT/541
March17, 2014

Response to Client Request II

To: Client
From: Consulting Group
Subject: Financial Implications of Pending Litigation
Financial Repercussions
The Generally Accepted Accounting Principles (GAAP) created financial reporting that will have some consequences from the client’s impending litigation. The first impact is with the obligation for contingencies in the financial statements to explain the probable account for the conclusion of the lawsuit that will cause a restatement. Pendantto the outcome of the litigation, the company is ordered to reorganize the debts of the organization via chapter 11 bankruptcy. The legitimacy of a patent is challenged in the lawsuit, which is a revenue creating asset for the client’s. The impending outcome of the asset will create testing the patent for impairment.
Reporting Requirements for Lawsuit Contingencies
The consequencesoflitigationfor the company financials hinge upon the expectedconclusion of the lawsuit. FASB Codification section 450-20-25-2 stipulates that in the event that theanticipated outcome of litigation results in a loss to the business, and can be rationallyprojected, then the cost should be accrued to the financials and footnoted as such.If the conclusion of the process is most likely to create a loss for the business, but thecost cannot judiciouslybe estimated, then FASB Codification 450-20-50-5 necessitates that a contingency disclosure be included to the financials describing the circumstances which would lead to the loss.
FASB Codification 450-20-50-6 mentions that if the proceedingsresults in no likely loss to the company, then there is no obligationof disclosure to the financial statements for the company.In 1975, FASB issued SFAS No. 5 which creates the standard for loss contingencies (Summary of SFAS No. 5, n.d.),where the SFAS clarifies…...

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