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Rossi Inc. Loss Contingency

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Submitted By bokaile
Words 1349
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Background
Rossi Inc. is a diversified manufacturer of industrial products. In 2008, Rossi updated its asbestos litigation liability, including the costs of settlement payments and defense costs relating to currently pending claims and future claims projected to be filed against the Company through 2017 for losses incurred to date. Before 2008, the Company’s previous estimate was for claims projected to be filed through 2011. As part of the 2008 update to the asbestos litigation liability, Rossi engaged Thompson and Associates, a consulting firm, to serve as an external specialist to estimate the claims liability for December 31, 2008. As a result of the 2008 update and the external specialist claims estimate, the Company significantly increased its recorded asbestos litigation liability by $586 million, arriving at a total liability estimate of $1,055 million as of December 31, 2008. During 2009, additional payments against the reserve reduced the recorded liability to $962 million. As of December 31, 2009, the Company performed an analysis of the asbestos litigation reserve and determined that the asbestos litigation liability should remain at $962 million. In 2009, Rossi Inc.’s average cost per claim litigation increased from $29,000 in 2008, to $34,000 due to management’s aggressive approach. This resulted in Thompson concluding that the litigation liability account should have a carrying value of $1,124 Million instead of $962 Million. Management of Rossi Inc. thinks that there aggressive approach to litigation claims in 2009 and revised defense strategy will decrease litigation cost and defense cost in the future.
Research Question:
You have been asked by the engagement partner to review the client’s accounting for the asbestos litigation liability and determine the appropriate accounting literature for Rossi’s recognition and measurement of the asbestos

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