[tgrimaldi]

During year 2, a former client sued the company for inappropriate work. Legal counsel has advised that it is “reasonably possible” that the company will be assessed damages. A damage amount can be estimated.

The answer from Wiley is that you don’t accrue the expense and only need to document in the AFS — why?

I would think because it is estimated, you could accrue for the liability:

Legal Exp XXX
Accrued Liability XXX

Then you reverse/adjust once it is finalized?

[AusNat]

Reasonably PROBABLE -> accrue the loss (if it can be estimated) and disclose
Reasonably POSSIBLE -> don't accrue the loss, but do disclose (this is a lower likelihood than reasonably probable, where it's not more likely than not that the entity will have to pay)
Highly unlikely, not reasonably possible, etc -> Don't accrue or disclose

[tgrimaldi]

ahhhhhhhhhhhhhhhhhhh okay – thanks!

[Author]

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