Question

M International (“M”) and W Inc. (“W,” a competitor of M) have been engaged in long- standing litigation over a specific patent infringement matter. Below is a summary timeline of specific events that have taken place related to this matter:

1. In May 2007, W filed a claim against M for patent infringement.

2. For the year ended December 31, 2007, management of M determined that a loss for this matter was probable and represented that the estimate of loss was in the range of $10 million to $15 million, with $12 million being the most likely amount of loss within the range.

3. A jury trial took place in September 2009.

4. The jury reached a verdict on September 24, 2009, and a judgment was ordered in favor of W. The judgment required M to pay W $14 million.

5. In November 2009, M filed a Notice of Appeal with the Court of Appeals.

6. In December 2010, the Court of Appeals issued a ruling in favor of M’s appeal and reversed the lower court’s ruling on the matter. This meant that the Court of Appeals overturned the jury verdict and the $14 million judgment against M.

7. On December 20, 2010, management of M determined this matter was closed upon discussions with in-house legal counsel.


Question: For the year-end December 31, 2010 financial statements, what amount should M record as a liability?

Answer 1

In the end of 2007, M should record $12 million as the liability as it is the most likely amount of loss due to litigation. In 2009, Jury has verdict to pay W Inc. $14 million by M Inc. Thus, there is additional liability of $2 million. In 2010, the court has reversed its decision and thus M Inc. doesn’t require to pay anything but from conservatism viewpoint. M Inc. should record contingent liability of $14 million as there is the probability of rehearing or re-appealing the decision. Hence, liability in 2010 end will be $14 million.