Case 13-8:Accounting for a Loss Contingency for a Verdict Overturned on Appeal

A corporation cannot use net operating losses between C corporation years and S corporation years, with the only exception that net operating losses from C corporation years can reduce net recognized built-in gains from S corporation years.

The entries required to recognise the deferred tax which is included in the profit or loss for the period.

A prior period adjustment is a correction, for an accounting error, on the financial statements of a prior year. ASC 250-10-50-7 states that “when financial statements are restated to correct an error, the entity shall disclose that its previously issued financial statements have been restated, along with a description of the nature of the error. The entity also shall disclose …the cumulative effect of the change on retained earnings or other appropriate components of equity or net assets in the statement of financial position.” The adjustment to the estimate is not a correction due to an error. Therefore, it should not affect or restate retained earnings or liabilities recorded in prior periods

There would still be a net loss in 2006 due to the increase of break-even point, which increased from $7,505 to $8,640.

25-7 If a loss cannot be accrued in the period when ti is probable that an asset had been impaired or a liability had been incurred because the amount of loss cannot be reasonable estimated, the loss shall be charged to the income of the period in which the loss can be reasonably estimated and shall not be charged retroactively to an earlier period. All estimated losses for loss contingencies shall be charged to income rather than charging some to income and others to retained earnings as prior period adjustments.”

As discussed above, if indicators of impairment exist for an asset (group) to be held and used, an entity determines whether the sum of the estimated undiscounted future cash flows attributable to the asset (group) in question is less than its carrying amount. If those undiscounted cash flows are less than

Section 360-10-35-17 of the Code states that an impairment loss shall be recognized if the carrying value of a fixed asset is not recoverable and exceeds its fair value. The carrying value of the fixed asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and disposal of the asset. An impairment loss shall be measured by the amount by which the carrying value exceeds the fair value.

ASC 320-10-35-35: “In periods after the recognition of an other-than-temporary impairment loss for debt securities, an entity shall account for the other-than-temporarily impaired debt security as if the debt security had

Because $2.3 million is less than the Carrying Value of the asset group of $4.7 mm, ($2.3 million < $4.7 million), The Impairment loss will be Fair Value of Asset less carrying amount of asset group.

As per ASC 450-20-25-2, entities should accrue an estimated loss from a loss contingency by a charge to expense and a liability recorded only if both of the following conditions are met:

First, Main Line’s maximum and minimum lost profit amounts should not be revised downward. The 3 million dollars represents an estimate of predictable future cash flows from domestic distribution. The deal not being finalized does not in any way change

In accordance with ASC 855-10-25-3, An entity shall not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued. See paragraph 855-10-55-2 for examples of non-recognized subsequent events.

______     2.     A loss incurred from expropriation (the company owned resources in South America which were taken over by a dictator unsympathetic to American business).

Division 230 applies to the gains and losses made from financial arrangements. More specifically, the general rule is that gains made from financial arrangements are included in assessable income and losses made from financial arrangements that meet the nexus test are deductible.

Upon review this cession, it is unclear how this loss triggers/falls within our 1999 contract period of 09/01/99 – 08/31/00. Could you kindly review with Zurich American Insurance Company (Zurich) and provide clarification how our contract responds to this.