MEMORANDUM

Date:
To: American Chemical Corporation
From:
Issue: How should ACC accrue and disclose the trial decision on their financial statement?
Recommendation: American Chemical Corporation should accrue and disclose the loss contingency on its Condensed Financial Statements from the lower court’s trial decision in the lawsuit from the Environmental Protection Agency.
Sources:
Discussion: This memo will discuss the accounting standards and adjustments for accruing and disclosing the loss contingency for American Chemical Corporation (ACC). Mr. Molina and the management team chose not to accrue and disclose the loss in the lower court’s trial decision; this violates the FASB accounting standards.

A lower trial court had imposed a $70 million fine payable to the Environmental Protection Agency (EPA) for a series of pollution law violations. The company immediately appealed to the U.S. District court and had set aside the fine to a lower cost.
ACC’s external legal counsel assumed that the Court will hear the case in approximately three years, and it probably will assert the trial court’s decision to impose a fine. With the legal counsel’s analysis of similar cases, the estimated ranges of potential monetary outcomes were from $30 million to $70 million. ACC has put forth $5 million in legal fees as a reasonable estimate of the cost to appeal.

With the appeal, the ACC, EPA, and the World Bank entered into an assumption agreement. ACC assigned a security interest in various certificate of deposits (“CDs”) issued by the World Bank totaling $50 million to settle the payable due to the EPA. The Certificate of Deposit is scheduled to mature and ACC should reinvest and roll-over the Certificate of Deposit until the case has been resolved.

Recognition of an Asserted Claim

An asserted claim with an estimated loss should be accrued,