Case: Settlement

Discussion1 Is Fast Eddie required to accrue a liability as of March 31, 2011, financial statements related to the ongoing government investigation? If so, how much? Yes. Fast Eddie is required to accrue a liability of $3. 7 million. Subsequent Events are Events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. There are two types of subsequent events: a.The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events). b. The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (that is, nonrecognized subsequent events).According to ASC 855-10-25-1, an entity shall recognize in the financial statements t he effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements.An example of recognized subsequent events is that if the events that gave rise to litigation had taken place before the balance sheet date and that litigation is settled after the balance sheet date but before the financial statements are issued or are available to be issued, for an amount different from the liability recorded in the accounts, then the settlement amount should be considered in estimating the amount of liability recognized in the financial statements at the balance sheet date. The investigation was held in 2010 before the end of fiscal year on Mar 31, 2011.The $3. 7 million of settlement was offered in April 2011, before CPAs-R-Us completed its procedures and issued the audit report for the year ended March 31, 2011. The government did not accept offers t o settle before finalizing its investigation, as a result, Fast Eddie should accrue a liability as of Mar 31, 2011. According to ASC 450-20-25-2, the required accrual liability would be $3. 7 million. An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met: a.Information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. Date of the financial statements means the end of the most recent accounting period for which financial statements are being presented. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss. b. The amount of loss can be reasonably estimated. 50-20-50-10 talks about Litigation, Claims, and Assessments. As a result, the set tlement is a recognized subsequent event. According to EITF Topic No. D-77, â€Å"Accounting for Legal Costs Expected to Be Incurred in Connection With a Loss Contingency† (ASC 450-20-S99), The SEC Observer noted that the SEC staff would expect a registrant's accounting policy to be applied consistently and that APB Opinion No. 22, Disclosure of Accounting Policies, requires disclosure of material accounting policies and the methods of applying those policies. Discussion2If Fast Eddie withdraws the settlement offer before it is accepted by the government and before the issuance of Fast Eddie’s financial statements, would that change your answer to the above question? According to 450-20-55-36, Fast Eddie should provide an illustrative disclosure in accordance with ASC 450-20-50. In this case, accrual would be inappropriate, but disclosure would be required if an unfavorable outcome is determined to be reasonably possible but not probable (450-20-55-13). Since Fat Eddie believes the company is not obligated.