Problem:
The following article raises questions about Cardinal Health’s accounting for an expected legal settlement. Management responded to the accusations by sending a letter to all shareholders and to analysts who covered the firm.
Required:
1. Are the GAAP rules for recognizing contingent gains (and a corresponding receivable) the same or different from those for recognizing contingent losses (and a corresponding liability)? Consult FASB ASC Topic 450 Contingencies.
2. In view of the details outlined in Cardinal Health’s letter to analysts and investors, do you believe the company fully complied with FASB ASC Topic 450 as it pertains to recognizing contingent gains? Why or why not?
3. If asked, how might management respond to questions about the timing of the gain recognition in 2001 and 2002?
4. Suppose that management was intent on informing analysts and investors about an expected litigation settlement amount. How might this be done in situations where GAAP precludes recognizing the gain on the financial statements?
The information is enclosed below. Please find attachment.
Attachment:- Cardinal Health.rar