Explains how the impairment of the patent would be reflected on the financial statements in the event of losing a lawsuit - page 377

Response to Client Request II
Week 4
Team A
Names
ACC/541
Date:

MEMORANDUM
TO:
FROM:
DATE:
SUBJECT: Financial Implications of Pending Litigation
____________________________________________________________

__________________

Financial Implications
The pending litigation has several implications for accurate financial reporting as established in the Generally Accepted Accounting Principles (GAAP). The immediate impact is the requirement for contingencies in the financial statements to report the potential that these statements will be restated to account for the outcome of the lawsuit. Pending the outcome of the lawsuit, the company may be required to reorganize their debts under a chapter 11 bankruptcy. The lawsuit also challenges the validity of a patent, which is a revenue generating asset of the client’s. Pending the outcome of the lawsuit, the patent will need to be tested for impairment.
Reporting Requirements for Lawsuit Contingencies
The implications for the lawsuit on the company financials depend upon the anticipated outcome of the lawsuit. If the anticipated outcome of the lawsuit is likely to result in a loss to the company, and that loss can be reasonably estimated, the loss should be accrued as estimated into the company financials, and noted as such, as detailed in the FASB Codification section 450-20-25-2.
If the outcome of the lawsuit is most likely to subject the company to a loss, but that loss cannot reasonably estimated, then FASB Codification section 450-20-50-5 requires that contingency disclosures be added to the financial statements outlining the conditions, which could result in the additional loss.
If the outcome of the litigation is not considered likely to result