Derivative Instruments, Debt, and Contingencies Essay

Derivative Instruments, Debt, and Contingencies - Essay Example The third issue that the company must deal with is the possibility of patent impairment. This memo will discuss the topics of contingencies, debt rewritten based on bankruptcy protection, and impairment of patents. A contingency can be defined as a possible loss/liability or gain/asset, which may or may not be realized in the future (Ecfa, 2011). There are different types of contingencies such as obsolesce of inventory, employee claims, impairment of machinery and equipment, and lawsuits. Your company is currently facing a legal contingency resulting from the possibility of a lawsuit. The accounting statement that deals with contingency is SFAS No. 5 (Pwc). There are different scenarios that the firm must analyze in order to determine whether or not the contingency must be reported in the financial statements or as notes to the financial statements of the company. SFAS No. 5 establishes precise rules and guidelines that accountants must follow in order to comply with the generally accepted accounting principles. The probability of occurrence of the lawsuit is one of the determining factors on whether or not it the lawsuit should be reported within the financial statements of the company. The second factor to consider is whether of not the loss contingency can be estimated. The general rules to follow in relation to loss contingencies are illustrated in the table below: Based on the table above the company can determine the proper accounting treatment. I recommend that the accounting department have a close meeting with the lawyers of the firm to determine the actual probability of the lawsuit occurring. If the lawyers are not able to determine this data then the firm should proceed to hire a risk management consultant to determine the probability of losing the lawsuit. The table in this memo provides the exact guidelines the company should follow to comply with the generally accepted accounting principles.