Question

Someone is suing your company! What two things do you need to determine, so that you know if you need to record a liability and expense, or disclose it in the notes?

Answer 1

If the loss contingency is both;

1. Probable, and

2. Its quantity can be reaonably estimated,

it should be reported on the balance sheet and the notes on accounts.

If the loss contingency is probable and its amount can be reasonably estimated, Loss- Litigation should be debited by the amount, with a corresponding credit to Litigation Liability.

On the other hand, if both the conditions are not met, the loss should not be accrued in the current year. If the loss contingency is too remote, not even a disclosure is warranted in the footnotes. However, if it possible or if it is probable, but no reasonable estimate of the loss is currently available, there is no need to accrue the loss and report the liability on the balance sheet, a disclosure note would suffice.