Help with accounting question, plzz

You are Chief Financial Officer of Camp Industries. Camp is the defendant in a $44 million class action suit. The company’s legal counsel informally advises you that chances are remote that the company will emerge victorious in the lawsuit. Counsel feels the company will probably lose $30 million. You recall the provisions of “Accounting for Contingencies,” Statement of Financial Accounting Standards No. 5, that a loss contingency should be accrued if a loss is probable and the amount can reasonably be estimated. A colleague points out that, in practice, accrual of a loss contingency for unsettled litigation is rare. After all, disclosure that management feels it is probable that the company will lose a specified dollar amount would be welcome ammunition for the opposing legal counsel. He suggests that a loss not be recorded until after the ultimate settlement has been reached. What do you think?

The purpose for that rule is to provide transparency for investors. The CFO should consider that he/she may be creating a second lawsuit if investors buy the stock, the price drops to the bottom on news of the first lawsuit and the information was withheld.

Placing a dollar value on the possible outcome of litigation is nothing more than a guess. The CFO should put their legal counsel together with the accountants to review the issue and follow their advice.