Loss Contingency
Summary
The proceeding business analysis depicts a patent infringement dispute between M International (“M”) and W Inc (“W”, a marketplace competitor). The prospect of an accounting for loss contingency changed throughout the course of the interactions between the two companies. W filed a motion to sue M in court due to patent infringement and a subsequent lawsuit endured as a result. A judgment had been awarded but then recanted in appellate court. Since the award did not transpire according to the original judgment, the method in which company M documents the loss contingency on financial statements changes.
Since company M had a successful judgment in appellate court, it is necessary for them to remove the litigation as a loss contingency on any financial statements. In the beginning, however, the company has an obligation to place the potential liability on any financial statements due to the prospect of having to pay the potential judgment. The proceeding information will explain the facts of the matter and provide a precise recommendation on how to appropriately handle the information on any financial statements.
Analysis
Any discussions or negotiations involving parties M and W were not made public in any legal or business proceeding. Therefore, the public only has access to the specific facts of the case through the literature that has been provided by law. From these documents the public can extract factual information regarding the dispute between the two companies.
The first matter of emphasis concerns the filing of a claim of patent infringement against company M on May 2007. Even thought a complaint had been filed, it does not conclude that party M had been involved in any wrong doing. Since company W had only been making an allegation followed by an official motion to pursue litigation, company M could then gather the alleged facts and prepare a defense in court.
Patent infringement, along with a multitude of other legal matters, frequently require multiple years in the judicial system before a verdict can be reached by a judge or jury. By the end of the 2007 calendar year, company M needed to make a business decision as to how it would document the potential litigation liability on its financial statements and other business records. The company projects it would be liable to pay between $15 million and $20 million. Attorneys speculated that $17 million would be the most likely determination.
After the jury decided to award company W $18.5 million, company M filled a motion to appeal. By the end of 2010, the appellate court reversed the original determination. On January 6, 2011, company W filed a motion to appeal before the same panel of judges and the petition had been rejected by the end of the proceeding month. By February 28, 2011, company M had been permanently free of any potential liabilities regarding patent infringement.
Fact Analysis
When company W filed the initial claim for patent infringement, business and legal staff must observe the matter as a potential liability. Even though company M had not been convicted of criminal activity or received any court judgments, staff should gather facts and build a defense against pending loss contingency. When matters of potential corporate liability arise, an immediate internal investigation by business and legal staff must gather the essential facts before preparing a defense in court (Hemphill 335). After conducting an investigation, company M determined it had a strong chance of losing in court and receiving a judgment. At this point, financial staff should place the highest possible range of judgment on any financial statements in order to information trustees and investors of potential loss. Therefore, placing a loss contingousy of $20 million on the financial sheet would be the best possible financial solution.
Conducting mediation prior to the start of litigation in September 2009 would be an efficient way to mitigate damages. While mediation and other forms of conciliatory proceedings remain confidential between the respective parties, the benefits for company M to enter resolution discussions with company W could significantly reduce loss contingency and eliminate liabilities. Mediation for business disputes can reduce the value of loss contingency by giving companies the opportunity to settle legal matters outside of the court setting. No public evidence exists of either party engaging in such confidential discussions.
After deciding to conservatively place the potential range for loss contingency on financial statements for 2007 and 2008, company M needed to adjust the information on the sheets for 2009. Since the company had a precise value for the judgment, financial staff could list $18.5 million as the essential value of loss contingency. This information must be shared with trustees and investors in order to stabilize financial contributors for business operation. After framing the characteristics of potential loss contingency, a disclosure of factual information should endure in order to provide pertinent information to appropriate parties. Even though company M had plans to make an appeal, inserting the absolute value on sheet for 2009 remains the appropriate business solution.
Even though the judgment had been reversed by the end of 2010, company M should not have changed its los contingency line item. Since company W had the opportunity for an appeal, the probability of liability still exist along with a reasonable estimate. Therefore, the best possible business solution would be to document the $18.5 million as loss contingency for an additional year.
The probability of liability had been reduced to zero in 2011; a value for loss contingency had been eliminated due to the court’s rejection of company W’s appeal. This represents the only appropriate point in which company M could remove the $18.5 million value as a loss contingency line item on 2011 financial statements.
Conclusion
Probability of liability and reasonably estimable values determine when businesses should include litigation and other disputes as loss contingencies on financial statements. Financial staff may not disclose the potential liability only when either of the two components is missing from the equation. If staff can only make a determination about one factor, business and legal should conduct further investigation in order to discovery missing values. Even when staff can determine both liability and a reasonably estimable data and values changes due to judgments and other factors, the adjust value should be listed as a line item on the financial statement for the current calendar year.
