Question

A company has been sued for as a result of damage done to a nearby protected land site. The company's legal firm advises that it is likely that the company will lose the suit and that it probably will result in a judgment of $2 million to $6 million in damages. However, the legal firm believes that the most probable amount of the loss will be $4 million, and that the suit will be terminated about 3 months hence. The company has no other lawsuits pending. Should the company record and disclose this event?

Answer 1

The company here have contingent liability and contingent liability when probable and estimable it shouls be accrued/ provided in books of accounts.

Also when no specific probable loss is estimable and range of probable loss are given accrue the most likely amount.

In the above given scenario, it is probable that company will lose the lawsuit and here the most probable amount given is $4,000,000.

Hence the company should record contingent liability of $4,000,000 and also disclose the event.

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