From: Accounting Firm
Pending lawsuits against a company are both expensive and detrimental to a company’s image. The decision to understand the implications of a lawsuit to the company is the first step in minimizing risk and potential loss to the organization. Research was conducted based on the guidelines of the FASB to answer the client’s questions pertaining to the lawsuit. The memo provided to the client will answer the following questions:
How are requirements for contingencies reported? What would happen to the financial statements if the client loses the lawsuit?
Will the client’s debt be forgiven if the mortgage is refinanced or if their mortgage will be refinanced if they file …show more content…
FASB Codification and the Accounting Treatment of Contingent Liabilities
According to FASB Codification 450-10-05-5, the "[resolution] of an uncertainty may confirm the acquisition of an asset, the reduction of a liability, the loss or impairment of an asset, and the incurrence of a liability." In this case, it is the incurrence of a liability. However, according to FASB Codification 450-10-05-6, "[not] all uncertainties inherent in the accounting process give rise to contingencies." If the lawsuit against the company gives rise to a contingency, then the case must be examined further.
Given the information provided and the FASB Codification, the debt is forgiven depending on the new mortgage contract the company is able to negotiate with its mortgage lender. If the new contract results in the recognition of a gain or loss, then such a gain or loss has to be recorded in the current period (Fasb, 2010).
How will the reporting on the financial statement be determined?
On the other hand, if the company files for a Chapter 11, the debt that will be written off depends on the new contract negotiated with the lenders. In other words, writing off the mortgage debt, or any debt at all, is not automatic.