A hospital that carries no malpractice insurance has several outstanding malpractice claims,including one for $1.5 million.Hospital attorneys believe the claim can be settled in the range of $200,000 to $340,000,but negotiations have not reached the point where they can estimate where within that range they can reach agreement.How should the hospital handle this claim in its financial statements?

Question

Quizplus · Accepted Answer

The hospital should report an expense and a liability of $200,000, which is the lower end of the estimated range suggested by its attorney. This is because the hospital's attorneys believe that the claim can be settled within this range, and the lower end of the range is the most likely outcome. The hospital should also disclose the potential for additional loss in the notes to the financial statements, as there is some uncertainty regarding the final settlement amount. This approach is consistent with the accounting principle of conservatism, which requires that losses be recognized when they are probable and reasonably estimable. Reporting the mid-point or upper end of the range would overstate the liability and expense, which would not accurately reflect the hospital's potential obligations. Reporting nothing on the face of the statements would also be inappropriate, as it would not provide users with the necessary information about the hospital's financial position and risks.

A Hospital That Carries No Malpractice Insurance Has Several Outstanding