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Client Advisory Memo

To: Brisk Industries

From: Bartlett, Green, Harris, & Ralph-Julien (BGH&R) Accounting Firm

Date: February 7, 2011

Subject:   Advice for pending lawsuit

CC: Michael Meyer, MBA, CPA ___________________________________________
Contingency Reporting Requirements
The pending lawsuit against Brisk Industries is considered a contingent liability.   A contingent liability is an expected future loss that might occur.   Brisk must determine whether this lawsuit warrants reporting in its financial statements.   In order for a contingent liability to be accrued and charged against income the following things must be true:
  * The likelihood of the occurrence is probable (likely to occur)
  * The amount of the loss can be reasonably estimated
  * Enough information must be available prior to the issuance of the financial statements to determine the probability and the amount.
If the above criteria are not met, then a disclosure must be made in the footnotes of the financial statements if the contingent liability has a reasonable possibility of taking place (Financial Accounting Standards Board, December 1998).   BGH&R will consult with Brisk’s lawyers to determine the probability of loss resulting from the lawsuit.   As stated in the 1998 Financial Accounting Board’s amendment to Statement No. 5 lawyers should evaluate the outcome of matters of pending or threatened litigation, and estimate any resulting losses, in accordance with the American Bar Association’s Statement of Policy Regarding Lawyer’s Responses to Auditors’ Requests for Information (Financial Accounting Standards Board, December 1998).   Once the probability is determined it will be evaluated by the previously discussed criteria.   If the three rules for reporting exist, then the loss will be included in Brisk Industries’ financial statements.   Otherwise, the loss will be captured in the footnotes....