Question

Question: What factors must be considered in determining whether or not to record a liability for pending litigation? For threatened litigation?

Short answer

Answer

The factors that are considered to determine whether or not to record a liability for pending litigation include the time period, probable outcome, and loss evaluation.

Step-by-step solution

Meaning of litigation Costs

Litigation costs are defined as the costs that are incurred by the company because of the proceedings by another party on the said company, and it consists of the fees paid by the company to lawyers to defend the case as well as court fees.

Factors considered for recoding liability for pending litigation and for threatened litigation

While ascertaining whether or not to record a liability for pending litigation, the following factors are taken into consideration. They are:

• The time frame in which the primary cause for action took place.
• The possibility of an adverse outcome.
• The capability to anticipate the actual amount of loss.

Before recording a liability for threatened litigation, the company must ascertain:

1. The extent of possibility that a case must be filed, and
2. The possibility of an unfavorable result.

The liability must be accrued if both are predictable, the loss can be estimated, and the reason for action is dated on or before the date of financial statements.