Question #1: It is believed that Danle’s decision to omit disclosure relating to the class-action litigation was not appropriate for the fiscal year ended December 31, 2009. This conclusion was reached because both litigations were determined to not be “probable” and thus need not be accrued for (as required by ASC 450-20-25-2), yet Danle’s legal counsel concluded that the litigation could “potentially but not probably” cause a future loss. The use of the word “potentially” can be reasonable assumed to mean reasonably possible, which is defined as more than remote but less than probable. ASC 450-20-50-3 states, “Disclosure of a contingency shall be made if there is at least a reasonable possibility that a loss or an additional loss may have been incurred,” and “an accrual is not made for a loss contingency because any of the conditions in paragraph 450-20-25-2 are not met.” As previously stated no accrual was made because the litigations were not considered probable, however the language used by Danle’s legal counsel to describe the litigation was interpreted to mean reasonably possible. Therefore ASC 450-20-50-3 applies and proper disclosure is needed for the financial statements of fiscal year December 31, 2009. As additional proof ASC 450-20-50-5 clearly states, “Disclosure is preferable to accrual when a reasonable estimate of loss cannot be made. For example, disclosure shall be made of any loss contingency that meets the condition in paragraph 450-20-25-2(a) but that is not accrued because the amount of loss cannot be reasonably estimated (the condition in paragraph 450-20-25-2[b]).” Additionally, this information would affect the amount, timing and uncertainty of net future cash flows, which FASB’s Statement of Financial Reporting Concept #8 declares is information that must be conveyed to potential and existing creditors, lenders and investors.
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