Discussion — Accounting for events after verdict overturned on appeal

Should M record the reduction of the previously recorded loss contingency in 2010 (upon the Court of Appeals overturning the verdict of the jury) or 2011 (once the appellate judges declined W’s petition for a re-hearing)?

Accounting Alternatives

Alternative 1 — Reduce the amount of the loss contingency in 2011 upon the appellate judge’s decision to decline W’s petition for a re-hearing.

Since there is a possibility that the Court of Appeals verdict can be overturned through a subsequent re-hearing following the appellate judge’s decision to decline W’s petition, M should wait to reverse the previously accrued loss contingency liability following the re-hearing.

Alternative 2 — Reduce the amount of loss contingency in 2010 upon the Court of Appeals overturning the verdict of the jury.

The Company should reduce the amount of its loss contingency given the ruling reached by the Court of Appeals to overturn the verdict, since the loss contingency is no longer probable. Further, M should treat the reduction in the amount of the loss contingency as a change in estimate.

Solution – Choose the Most Appropriate Alternative and Give Supporting Evidence for Your Choice Providing the Correct Pronouncement Guidance