Rossi Inc Case Solution

1. ASC 450 applies to this case. Provide citation and explain in your own words.

ASC 450 primarily provides disclosure and reporting guidance in case of loss and gain contingencies. It is divided into three sub-parts where conditions are explained in case of overall, gain, and lost condition (Wiley Insights, 2015). So ASC 450 applies to this case in a manner that it provides an example of audit procedures during the time of claim based law suit liabilities. 

2. According to ASC 450, what is a loss contingency? Provide citation and explain in your own words.

Loss contingency refers to a present situation whereby the company experiences a loss or damage due to dealing in a particular product, possible future claims arising out of it, cost of litigation and legal settlements associated with it, or loss of property due to potential hazards associated with the use of a particular product (Wiley Insights, 2015) (KPMG, 2014).

3. ASC provides examples of loss contingencies. Provide citation, list the examples, and explain which of the examples apply to this case.

Examples include, in case of a law suit where the company has an idea that the outcome would be unfavorable – the estimated cost of settlement. Secondly, categorization of warranty claims as liability without even knowing the potential cost of it (Wiley Insights, 2015). 

In the case of Rossi Inc., there are several on-going law suits and potential claims, which might go against the firm so in that case, they would be categorized as loss contingencies as per the first example mentioned above.  

4. According to ASC 450, what conditions must be present to accrue a liability on a company’s balance sheet? Provide citation and explain in your own words. Are these conditions met in this case?

As per the accounting principle ASC 450, there are at least two conditions that have to be met before accruing the liability on the financial statements of the firm. First, the possibility of liability has to be incurred before the date of publish of financial statement. Second, it is essential for the firm to be in a capacity to estimate the loss arising out of the liability and the litigation process (Wiley Insights, 2015). 

As per the application of this principle on Rossi Inc., it is apparent that the possibility of liability has already incurred before the release of financial statements, which means the first condition is met. Regarding the second condition, which is perhaps the most critical aspect, the internal audit along with the support of external consultants have had some difficulty in accurately estimating the amount of claims as the figure has varied at different points due to varying factors. But generally, both the conditions have been met. So it is the responsibility of the company to adequately disclose in the financial statements.

5. When is it appropriate to not accrue a liability, and just disclose the threat of litigation in the footnotes to the financial statements? Provide citation and explain in your own words.

In a situation, where the company has a clear idea about the possible unfavorable outcome of the law suit arising out of claims made against the use of a particular product, but the legal counsel is not able to provide a rough estimate to the accountants then only it is acceptable as per the financial principle to not accrue a liability but disclose the threat of litigation in the footnotes of the financial statements so as to give a clear idea to shareholders as well as, other stakeholders (Wiley Insights, 2015).

6. What factors should be considered in estimating the likelihood and amount of a loss? Provide citation and explain in your own words.

As it is known that estimating the probability of any future event is considerably difficult and no matter how meticulously done can never be claimed to be accurate, hence it is obvious that the process of estimation and factors considered will vary case to case. First of all, it is essential to identify the level of probability of the loss, which can either be probable – likely to occur, reasonably probable – more than remote but less likely, and remote – slight chance (Schiff, Schiff, & Rozen, 2012). For instance, in case of product warranty if the company sells 1000 products then it is probable that at least few of the products will be claimed within the warranty period, but the likelihood of all products being claimed is remote unless there is a major manufacturing fault. 

For the estimation of amount, it is essential to identify the value that the customer/ the other party may be deriving out of the usage of a particular product hence, the claim made may be linked to the degree of disruption caused to value addition process (Schiff, Schiff, & Rozen, 2012).