Question
Hokey Pokey International (HP) and Okey Dokey Associates (OD), a competitor of HP, have been engaged in longstanding litigation over a specific patent infringement matter.
Hokey Pokey International (HP) and Okey Dokey Associates (OD), a competitor of HP, have been engaged in longstanding litigation over a specific patent infringement matter. Below is a summary timeline of specific events that have taken place related to this matter: In May 2019, OD filed a claim against HP for patent infringement. For the year ended December 31, 2019, management of HP determined that a loss for this matter was probable and represented that the estimate of loss was in the range of $25 million to $35 million, with $29 million being the most likely amount of loss within the range. A jury trial took place in September 2021. The jury reached a verdict on September 24, 2021, and a judgment was ordered in favor of OD. The judgment required HP to pay OD $32.25 million. In November 2021, HP filed a Notice of Appeal with the Court of Appeals. In December 2022, the Court of Appeals issued a ruling in favor of HPs appeal and reversed the lower courts ruling on the matter. This meant that the Court of Appeals overturned the jury verdict and the $32.25 million judgment against HP. On January 6, 2023, OD 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, 2023, the appellate judges declined the petition for a re-hearing. On February 28, 2023, management of HP determined this matter was closed upon discussions with in-house legal counsel. Required: 1. For the year-end December 31, 2019, financial statements, what amount should HP record as a liability? 2. For the year-end December 31, 2021, financial statements, should HP adjust its liability? If so, what amount should be recorded; and should the amount of the adjustment be considered a 2021 event or a prior period adjustment? 3. Should HP record the reduction of the previously recorded loss contingency in 2022 (upon the Court of Appeals overturning the verdict of the jury) or 2023 (once the appellate judges declined ODs petition for a re-hearing)?
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