Energy Inc. case

The company should report the change in the contingency accrual as a 2009 event due change in estimate. ASC 250-10-45-17 specifies that “a change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods.” Additionally, ASC 450-20-25-7 indicates that “all estimated losses for loss contingencies shall be charged to income rather than charging some to income and others to retained earnings as prior period adjustments”.

As ASC 450-20-25-2 states, an estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met:

Advanced Fuels Corporation (AFC) was founded five years ago by Dr. Zachary Aplin. In the fourth year of research he and his two –member staff made a major break-through that can convert grain waste products into ethanol which can mix with gasoline to produce a better burning automobile fuel. Producing ethanol from waste products would lower its cost dramatically so the market potential of the blended fuel would be increased. After AFC receiving a patent for Dr. Aplin’s unique ethanol production process he decided to broaden the scope of operations of the company but he doesn’t have additional funds to put in. So, he developed

Net capital loss carryovers but not carrybacks are deductible against capital gains in determining a corporation 's net operating loss for the year.
True

An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met:

One liability that the amount must be estimated is associated with warranties. Many companies offer warranty coverage of their products. It is important for the potential warranty expenses to be calculated in the same period as the products are sold. This expense is usually estimated as a percentage of sales revenue based on historical data relating to warranty claims. In accordance with the matching principle and GAAP standards, the revenue and warranty expense must be recorded within the same reporting period. This is the only way to ensure that revenues are not overstated and liabilities are not overstated. In this way the financial health of a company can be accurately assessed. Contingent liabilities are another type of liability that must be estimated. Contingent liabilities are potential liabilities that are contingent upon certain circumstances. They are only potentially liabilities, however, they must still be recorded as such in accordance with the matching principle. One example of a contingent liability is a pending lawsuit. If the lawsuit is lost then the company will need to pay, therefore the money must be thought of as already spent until the lawsuit is final. Another example of a contingent liability occurs when one company cosigns

An accrual is not made for a loss contingency because any of the conditions in paragraph 450-20-25-2 are not met., b.  An exposure to loss exists in excess of the amount accrued pursuant to the provisions of paragraph 450-20-30-1.” Therefore, they also need to disclose the range of the possible loss with some explanation.

As per ASC 450-20-25-2, entities should accrue an estimated loss from a loss contingency by a charge to expense and a liability recorded only if both of the following conditions are met:

For purposes of recognition and measurement of an impairment loss, a long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. However, an impairment loss, if any, that results from applying this Statement shall reduce only the carrying amount of a long-lived asset or assets of the group in accordance with paragraph 14.

In accordance with ASC 855-10-25-3, An entity shall not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued. See paragraph 855-10-55-2 for examples of non-recognized subsequent events.

b. The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The quantitative approach described in the definitions of the terms expected losses, expected residual returns, and expected variability is not required and shall not be the sole determinant as to whether a reporting entity has these obligations or rights.”

Considering real world practices, as well as in accordance with the conceptual framework from the textbook, accrual of a loss from ongoing litigation is rare. Companies usually do not record a loss until after the ultimate settlement has been reached. For example, the Las Vegas Sands Corporation, in a recent quarterly report, disclosed but did not accrue damages from a lawsuit it lost, even after the award was affirmed by the trial court, because the company believe that it has valid bases in law and fact to overturn or appeal the verdict. Consequently, M corporation should not accrue the contingency loss but continually disclose the matter even when a judgment was reached against the corporation to pay $18.5 million in 2009, given that the

* Comments relating to the adequacy of disclosures, the actual descriptions of rate reconciliation items, deferred tax assets and liabilities, uncertain tax positions, timing of reversals, or expiration of net operating losses in various jurisdictions.

a. Explain the value chain for gold mining firms (how can a mine create a competitive advantage relative to its rivals). What are the factors that may explain exceptional performance of ABX relative to the other gold mines?

Hanover-Bates Chemical Corporation produces chemicals for the chemical plating industry. It has plants in Los Angeles, Houston, Chicago, and Newark. The production process involves taking chemicals purchased from other suppliers and mixing them into user-based formulas. The Hanover-Bates has a strong balance sheet and trades on the over-the-counter market. There are seven sales districts within the organization with a total of forty sales representatives. Each receives a salary, fringe benefits, and commissions of 0.5 percent of their dollar sales volume up to their sales quota. Field sales efforts are extremely important and quality control is critical with supplying the plater with the