Discussion — Accounting for year-end financial statements December 31, 2007

For the year-end December 31, 2007, financial statements, what amount should M International (“M”) record as a liability?

Accounting Alternatives

Alternative 1 — Recognize and disclose $20 million.

M should record $20 million as an accrued liability for the loss contingency and disclose the nature of this liability within notes to the financial statements. This is in accordance with guidance under ASC 450-20-25-2, which states, in part:

An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met:

1. Information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. Date of the financial statements means the end of the most recent accounting period for which financial statements are being presented. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.

1. The amount of loss can be reasonably estimated.
2. After considering the above guidance, given that the loss is probable of occurring and is estimable, it is prudent, reasonable, and conservative of M to record an accrual at the high end of the $15 million to $20 million range as a loss contingency. Disclosure of the nature and amount of the liability should follow disclosure requirements under ASC 450- 20-50.

Alternative 2 — Recognize $17 million and disclose $3 million.

Consistent with the guidance under ASC 450-20-25-2 quoted above, M should recognize an accrued liability for the loss contingency in its December 31, 2007 financial statements. An amount of $17 million, being the most likely amount in the range, should be accrued as the amount of the loss contingency and recorded in the financial statements, and disclosure should be made for the difference between the most likely amount of $17 million and maximum loss amount of $20 million.

Alternative 3 — Recognize $15 million and disclose $5 million.

Consistent with the guidance under ASC 450-20-25-2 quoted above, M should recognize

an accrued liability for the loss contingency in its December 31, 2007 financial statements. Given that the loss is probable of occurring and is estimable, it is prudent and reasonable for M to record an accrual at the low end of the $15 million to $20 million range as a loss contingency. Disclosure of the nature and amount of the liability should follow disclosure requirements under ASC 450-20-50.

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