Accounting for a Loss Contingency Associated with a Lawsuit

Following is a summary of the write-up for the case on contingencies and my expectations from you regarding the format and content and the grading for the case out of a total of 30 points. You should write this memo as if I have not read the case material before and the memorandum should “stand on its on” without one having to ask for additional information to agree with your conclusion.

a- Case should be in Memorandum format with appropriate heading to include the following- 5 points

From : You

To: Memo to the Files

Date :

Subject: Accounting for a Loss Contingency Associated with a Lawsuit

b- Purpose – Short write-up 1-3 sentences that summarizes the purpose of the memorandum. 5 points

c- Background – Description of the facts in manner that you believe is most appropriate. 5 points

Presentation could be in bullet form, outline form, short narrative, paragraph form. Do not omit any relevant information and do not embellish any information and most definitely do not make up any information.

d- Authoritative Literature – 10 points Summarize where the guidance for authoritative literature is found referencing in paragraph form the appropriate section(s) in the ASC. Cite specific paragraphs in the ASC by referencing paragraph numbers (i.e. – ASC 850-20-25-4 (i) states that “….in accounting for mining rights for property that is leased …….”). You can use the exact passage as long as you add “….” or you can paraphrase. In either case reference the paragraph specifically.

Relate the facts of the case to the ASC.(ie. In our case the property mining rights are located on property under a 4 year lease and thus the rights should be accounted for as noted ASC above. The cost for the rights and the asset retirement obligation should be measured based upon the discounted expected cash flows. This would require applying probability analysis to determine the expected cash flow and that amounts should be discounted using the companies weighted average cost of capital as follows: ………………..”

Credit will be given for each relevant paragraph in the literature that is identified and irrelevant paragraphs will result in deductions. Grading will also be based on grammar, sentence and paragraph structure.

e- Conclusion – 5 points Brief summary that summarizes your conclusion on how the lawsuit loss contingency should be accounted for. Note the requirements for any accruals, the amounts, and when the accruals and any subsequent adjustments may occur.

Do not just answer the questions in the case- the overall question is how to properly account for the loss on the lawsuit based upon the facts as presented. How to account for the lawsuit will include any accruals or disclosures as required by your interpretation of the relevant ASC.

Stay with the guide above and you will do well.