Question

Historically, the Company’s policy has been to recognize legal fees associated with a loss contingency as those fees were incurred. Prospectively, the Company will accrue the total estimated legal fees when the claim is incurred. Management provides you with the guidance which states that either method is acceptable under US GAAP 1. Is this change allowed? If so, is it a –Change in accounting principle –Change in accounting estimate –Correction of an error in previously issued financial statements, or –Change in reporting entity 2. In what Period should this be recognized (retrospective, current and/or prospective) 3. Is financial statement disclosure required?

Answer 1

The given case is about the recognition of legal fees.

Legal fees are to be recognized as and when they are incurred based on accrual concept.

But regarding the loss contingency, it can be either disclosed or disclosed and accrued or need not even be disclosed.

If the loss contingency is remote - No disclosure or accrual is to be made. If it is Reasonably possible - disclosure is to be made; It it is probable - disclosure and accrual may be made.

Therefore, the comapny if accrues the total estimated legal fees it is not a correct criteria to be made.

The change is not allowed., As per accrual concept, the legal fees are to be recognised as it incurs.

2. The legal fee are to be recognized retrospectively.

3. Financial statement disclosure regarding the items are required only if the loss contingency is reasonably possible or probable.