Question

A customer got serious food poisoning from Tasty Feast restaurant on March 30, 20x2, necessitating a trip to the emergency room. On April 5, 20x2, the customer initiated a lawsuit. At December 31, 20x2, Tasty Feast estimated its probable loss to be $50,000. In January, 20x3, before issuance of Tasty Feast’s financial statements, a judge ruled in favor of the customer and awarded the customer $80,000 in damages. Must the company recognize the effects of this ruling in its 20x2 financial statements? Explain.

Answer 1

Yes, Tasty Feast restaurant must recognize the effect of this ruling in their financial statements by recognizing the loss. As per ASC 450-20-35-2 An estimated loss from contingency shall be recognized if the following conditions are met:

A. Information available before issue of financial statements.

B. The amount of loss can be reasonably estimated

As the conditions are met as per guidance suggests Tasty Feast should disclose and accrue the liability within its 20x2 financial statements.