Date: April 14, 2018
To: Tess La (CFO), Latinum Star Corporation
From: XYZ staff accountant
RE: Accounting treatment of the lawsuits filed against Latinum
Research:
I am obliged to you for giving me this opportunity. As requested, I have gathered all the facts and figures related to this case. In the past, such claims were made against the company, and just in one case, a court order against the company. According to the findings, a claim for these two cases is more than the actual loss. The claim made by the plaintiff in 2016 was less than 50% of the real suit. The other claim made in 2017 was for $250 million. However, the amount of loss is not reasonably calculated, and the reasons for such loss are still unknown.
Recommendations:
According to IAS-37, provisions for one-off events like the settlement of a lawsuit are measured at the most likely amount (IAS 37.40). The amount referred to in the provision is the best estimate of the amount paid for the settlement of the case. Record an accrual when the loss is probable and can reasonably be estimated. If no estimation has been made about the accrued damage, the minimum amount should be recorded. Disclose the nature of accumulated loss in your financial statements (ASC450-20). So, for the claim of 2016, I made a provision and mentioned it in the financial report of 2017. The accrued amount for this provision should be estimated as less than 50% of the claim because of the facts given. The claim made during October 2017 should also be mentioned in the year-end statement.
Conclusion:
As the company’s accountant, I studied these two cases. I infer from the information given that it is our contingent liability (ASC Para. 470-49-25-2). We have to mention it in our statement, which ended on December 31, 2017.
