Question

Gallardo Co. is involved in a lawsuit as a result of an accident that took place...

Gallardo Co. is involved in a lawsuit as a result of an accident that took place September 5, 2017. The lawsuit was filed on November 1, and claims damages of $1,000,000. At December 31, 2017, Gallardo's attorneys feel it is remote that Gallardo will lose the lawsuit. How should the company account for the effects of the lawsuit? Assume instead that a December 31, 2017, Gallardo's attorney feel it is probable that Gallardo will lose the lawsuit and be required to pay $1,000,000. How should the company account for this lawsuit? Assume instead that at December 31, 2017, Gallardo's attorneys feel it is reasonably possible that Gallordo could lose the lawsuit and be required to pay $1,000,000. How should the company account for this lawsuit?

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Answer #1

Where the probability of losing the lawsuit is remote, no reporting is required. Thus, Gallardo is not required to record nor to disclose the contingent liability in its financial statements.

Where it is probable that Gallardo will lose the lawsuit and will be required to pay $1,000,000, it should record the contingent liability of $1,000,000 and also describe the same in the footnotes in the financial statements.

Where the probability of losing the lawsuit is reasonably possible, Gallardo need not record the contingent liability but should disclose the existence of the same in the notes that accompany the financial statements.

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