Question

An acquirer discovers that a competitor has filed a patent infringement lawsuit against the company it is acquiring. This lawsuit is not currently recognized on the acquiree's books.

How should the acquirer report the lawsuit at the date it makes the acquisition?

	A.	Report it as a liability if it is a probable liability and its value can be reasonably estimated.
	B.	Report it as a liability if it is a contractual or separable obligation.
	C.	Don't report it until it is settled.
	D.	Report it as a liability if it is more likely than not that they will lose the lawsuit.

Answer 1

Acquirer report the lawsuit at the date it makes the acquisition?

A. Report it as a liability if it is a probable liability and its value can be reasonably estimated.

Standards:-

Contingent liabilities need to pass two thresholds before they can be reported in financial statements. First, it must be possible to estimate the value of the contingent liability. If the value can be estimated, the liability must have a greater than 50 percent chance of being realized. Qualifying contingent liabilities are recorded as an expense on the income statement and a liability on the balance sheet.

If the contingent loss is remote, meaning it has a less than 50 percent chance of occurring, the liability should not be reflected on the balance sheet. Any contingent liabilities that are questionable before their value can be determined should be disclosed in the footnotes to the financial statements.