Problem:
Your client is being sued. You have asked the client's lawyer about the possibility of losing the lawsuit. The client, meanwhile, has asked you to describe what would happen to their financial statements. The client has also informed you that if they lose the lawsuit, they anticipate losing their mortgage and have started talking to their mortgage lender. They want to know if part of their debt is forgiven, or if their mortgage is rewritten, or if their mortgage will be written if they file Chapter 11.
The lawsuit also involves a patent held by the company. The company had acquired a hedge contract against the impairment of the patent. Aside from the recovery of the hedge, the client wants to know how the impairment of the patent will be reflected on the financial statements in the event of losing a lawsuit.
- Conduct research in FASB individually to answer your client's questions.
- Write a memo that is brief but fully explores the issues. Include the following in your memo:
1) Reporting requirements for contingencies and what would happen to the financial statements if the client loses the lawsuit.