German Auto Parts is a defendant in a multi-million dollar lawsuit that was filed in a prior year. The lawsuit was not previously disclosed in the financial statements or accompanying footnotes, as the company has vigorously defended its position and its attorneys initially indicated that the claim was not valid. During the current year, however, the facts and circumstances have changed such that the likelihood of a loss approximating $5 million is now considered reasonably possible. How should the company recognize this lawsuit in its current year financial statements?

Question

Quizplus · Accepted Answer

The company should disclose the lawsuit in the footnotes accompanying the financial statements, as the likelihood of a loss approximating $5 million is now considered reasonably possible. This means that the potential loss is not yet probable or estimable, and therefore should not be recorded as a contingent liability on the balance sheet. However, it is important that the company provides transparency to its investors and creditors by disclosing the lawsuit in the footnotes.

German Auto Parts Is a Defendant in a Multi-Million Dollar