Deloitte Case 13-08

Accounting for a Loss Contingency for a Verdict Overturned on Appeal

Georgia International (GA) and Western Inc. (Western, a competitor of GA) have been engaged in long-standing litigation over a specific patent infringement matter. Below is a summary time line of specific events that have taken place related to this matter:

• In May 2007, Western filed a claim against GA for patent infringement.
• For the year ended December 31, 2007, management of GA determined that a loss for this matter was probable and represented that the estimate of loss was in the range of $15 million to $20 million, with $17 million being the most likely amount of loss within the range.
• A jury trial took place in September 2009.
• The jury reached a verdict on September 24, 2009, and a judgment was ordered in
• favor of Western. The judgment required GA to pay Western $18.5 million.
• In November 2009, GA filed a Notice of Appeal with the Court of Appeals.
• In December 2010, the Court of Appeals issued a ruling in favor of GAs appeal and reversed the lower courts ruling on the matter. This meant that the Court of Appeals overturned the jury verdict and the $18.5 million judgment against GA.
• On January 6, 2011, Western filed a petition for a re-hearing before the same panel of appellate judges against the reversal of ruling by Court of Appeals.
• On February 10, 2011, the appellate judges declined the petition for a re-hearing.
• On February 28, 2011, management of GA determined this matter was closed upon discussions with in-house legal counsel. Required:

1. For the year-end December 31, 2007, financial statements, what amount should GA record as a liability?
2. For the year-end December 31, 2009, financial statements, should GA adjust its liability? If so, what amount should be recorded; and should the amount of the adjustment be considered a 2009 event or a prior period adjustment?
3. Should GA record the reduction of the previously recorded loss contingency in 2010 (upon the Court of Appeals overturning the verdict of the jury) or 2011 (once the appellate judges declined Westerns petition for a re-hearing)?