Posted: September 13th, 2017

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

Case 13-8
Accounting for a Loss Contingency for a Verdict Overturned on Appeal
M International (“M”) and W Inc. (“W,” a competitor of M) have been engaged in long-
standing litigation over a specific patent infringement matter. Below is a summary
timeline of specific events that have taken place related to this matter:

I In May 2007, W filed a claim against M for patent infringement.

0 For the year ended December 31, 2007, management of M determined that a loss
for this matter was probable and represented that the estimate of loss was in the
range of$15 million to $20 million, with $17 million being the most likely
amount of loss within the range.

A jury trial took place in September 2009.

o The jury reached a verdict on September 24, 2009, and a judgment was ordered in
favor of W. Thejudgment required M to pay W $18.5 million.

0 In November 2009, M filed a Notice of Appeal with the Court of Appeals.

0 In December 2010, the Court of Appeals issued a ruling in favor of M’s appeal
and reversed the lower court’s ruling on the matter. This meant that the Court of
Appeals overturned thejury verdict and the $18.5 million judgment against M.

o On January 6, 2011, W filed a petition for a re-hearing before the same panel of
appellate judges against the reversal of ruling by Court of Appeals.

0 On February 10, 2011, the appellate judges declined the petition for a re-hearing.

0 On February 28, 2011, management of M determined this matter was closed upon
discussions with in-house legal counsel.

Required:

1. For the year-end December 31, 2007, financial statements, what amount should M
record as a liability?

2. For the year-end December 31, 2009, financial statements, should M adjust its
liability? If so, what amount should be recorded; and should the amount of the
adjustment be considered a 2009 event or a prior period adjustment?

3. Should M record the reduction of the previously recorded loss contingency in
2010 (upon the Court of Appeals overturning the verdict of the jury) or 2011
(once the appellate judges declined W’s petition for a re-hearing)?

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