Client_Request

As the company’s representing accounting firm we have some information about your current situation. The information that follows should help you with any questions that you may have about the lass that you will have as a consequence of the pending lawsuit and the Chapter 11 bankruptcy that the company might go through. We will also help you with any other issues you might have during this process. Contingencies are possible future events that will have some impact on the company; in your company’s case you are anticipating a loss contingency. Due to this loss contingency that has been created from the lawsuit, there are reporting requirements that were created by Statement of Financial Accounting Standards (SFAS) No. 5. “Under SFAS No. 5 a loss contingency must be accrued only if the loss is both probable with the asset being impaired and some kind of liability has been incurred and the amount of the loss can be reasonable estimated (“New Loss Contingency Disclosure Standards,” 2009)”. If the company’s loss contingency is remote in its future happenings, disclosure/accruals are not required. Instead, a footnote of the loss contingency should be made about the lawsuit. It is important for the company to inform the investors of the lawsuit and the loss outcome of the suit. For the purposes of the company’s financial report, if there is not reasonable estimate for the loss they should disclose a footnote about the lawsuit. Then when the lawsuit is resolved and the company knows the amount of the loss they can disclose the amount of the loss due to the lawsuit. Statement of Financial Accounting Standards No. 5 must be followed when contingencies are present within a company. If there is a less than favorable outcome with the pending litigation, the cash flow of the company will come into some type of stress. That it might reach the point of considering a legal remedy relief under Chapter 11 of the U.S. Bankruptcy Code, allowing the company to reorganize its debts. The basic element of any Chapter 11 is the bankruptcy plan. It is imperative that the bankruptcy plan should provide a very detailed plan for creditors of the organization suing for relief for recuperation of funds allocated to the company through the restructuring of the company debt. Leading to a restructuring that will result in a modified repayment schedules, forgiveness of debt, modification of interest rates, and other such activities that allow the debtor to remain in business, and finally settle its debts with their creditors.