Rossi Inc. Essay

BackgroundRossi Inc. is a diversified manufacturer of industrial products. In 2008, Rossi modifyd its asbestos judicial proceeding indebtedness, including the hails of village payments and plea costs relating to currently pending claims and in store(predicate) claims projected to be filed against the Company through 2017 for losses incurred to date. Before 2008, the Companys former figure was for claims projected to be filed through 2011. As part of the 2008 update to the asbestos judicial proceeding liability, Rossi engaged Thompson and Associates, a consulting firm, to serve as an external specializer to estimate the claims liability for declination 31, 2008. As a result of the 2008 update and the external specialist claims estimate, the Company significantly increased its record asbestos judicial proceeding liability by $586 million, arriving at a total liability estimate of $1,055 million as of December 31, 2008. During 2009, additional payments against the reliever red uced the record liability to $962 million.As of December 31, 2009, the Company performed an analysis of the asbestos litigation reserve and come upd that the asbestos litigation liability should remain at $962 million. In 2009, Rossi Inc.s average cost per claim litigation increased from $29,000 in 2008, to $34,000 imputable to managements aggressive approach. This resulted in Thompson concluding that the litigation liability account should have a carrying value of $1,124 Million instead of $962 Million. instruction of Rossi Inc. thinks that there aggressive approach to litigation claims in 2009 and revised defense strategy volition decrease litigation cost and defense cost in the approaching. doubt QuestionYou have been asked by the network checkmate to review the clients accounting for the asbestos litigation liability and determine the appropriate accounting literature for Rossis recognition and measurement of the asbestos litigation liability.Relevant LiteratureAccountin g Standards Codification 450-20-25-1 & 2 Loss adventure Recognition 25-1 When a loss contingency exists, the likelihood that the future resultant role or events allow for confirm the loss or impairment of an summation or the incurrence of a liability can throw off from potential to remote. Asindicated in the definition of contingency, the term loss is used for convenience to accommodate many charges against income that be commonly referred to as expenses and others that are commonly referred to as losses. The Contingencies Topic uses the terms presumable, middling possible, and remote to identify three areas at bottom that regulate. 25-2 An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met a. Information forthcoming before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that an asset had been impaired or a liability h ad been incurred at the date of the financial statements. Date of the financial statements message the end of the most recent accounting period for which financial statements are being presented. It is implicit in this condition that it essential be probable that one or more future events will occur positivist the fact of the loss. b. The come in of loss can be fairly estimated.charges ApplicationRossi Inc. records indicate that litigation liabilities exist and that un-asserted litigations will line up in the future for events which occurred before December 31st, 2009. These claims can be reasonably estimated based a frequency severity method used in many asbestos litigation cases. Therefore, Management of Rossi Inc. has met both conditions and correctly accrued the reasonably estimated cost of the litigation liabilities. Accounting Standards Codification 450-20-30-1 Initial Measurement If or so tot up within a range of loss appears at the sequence to be a better estimate than any other tot within the range, that sum total shall be accrued. When no amount within the range is a better estimate than any other amount, however, the minimum amount in the range shall be accrued. Even though the minimum amount in the range is not necessarily the amount of loss that will be ultimately determined, it is not likely that the ultimate loss will be less than the minimum amount.ApplicationAccording to the Internal actuarial Specialist Report, the estimated cost of litigation ranges from $907 million to $1,514 million. Accounting Standards Codification 450-20-30-1 says that Rossi Inc. must accrue the lower amountof the range which is $907 million. The company must as head as create a disclosure note acknowledging that it is possible the litigation liabilities could cost as much as $1,514 million if the excess is reasonably probable. Research QuestionWhat additional audit procedures, if any, should you suggest to the engagement provide in order to prize the a ppropriateness of the asbestos litigation liability as of December 31, 2009?Relevant LiteratureStatements on Audit Standards No. 12- AU subsection 337 Paragraph 6 & 7 .06 An auditor ordinarily does not deliver legal skills and, therefore, cannot make legal judgments concerning information coming to his attention. Accordingly, the auditor should collect the clients management to send a garner of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments. .07 The audit normally includes certain other procedures undertaken for different purposes that cleverness also disclose litigation, claims, and assessments. Examples of such procedures are as follows Reading proceeding of meetings of stockholders, directors, and appropriate committees held during and subsequent to the period being audited. Reading contracts, loan agreements, leases, and commensurateness from taxing or other governmental agencies, and similar documents. Obtaining infor mation concerning guarantees from desire confirmation forms. Inspecting other documents for possible guarantees by the client.ApplicationThe engagement render should ask management to send their legal counsel a letter of inquiry, outlining all litigation procedures currently in progress and claims or assertions for future litigation. Because of attorney-client confidentiality, the lawyer may refuse to response to the letter of inquiry alternatively, the engagement render can obtain this information from other sources. The engagement partner can read the documented minutes of meetings of directors and company committees, as well as, contracts created between Rossi Inc. and its customers for possible grounds for future lawsuits. The auditor should also pass on to understand how Rossi Inc. management developed its estimate for the litigation liability, then he/she should review and test those procedures used by management. Research QuestionConsidering the range of the estimated cla ims liabilities, do you believe that there is an uncorrected likely misstatement that the engagement partner should request the client to correct?InterpretationThe engagement team has already determined that the litigation liabilities account is a material account with corporeality for the audit set at $12.5 million. The litigation liabilities account currently has a balance of $962 million however, ASC 450-20-30-1 states that account should reflect the lower amount of the reasonably measured range of possible litigation cost. The amount which should be recorded is $907 million which is $55 million less than the currently recorded amount. With physicalness set at $12.5 million, the engagement partner should request Rossi Inc. correct the amount of the litigation liabilities account to fix the likely misstatement.ConclusionRossi Inc. has met both conditions of ASC 450-20-25-2 because it is probable the company will have litigation losses in the future from events which occurred dur ing or before this accounting period. These losses have been reasonably estimated into a range of $907 to $1,514 million. According to ASC 450-20-30-1, when a range exists and no number in the range is more likely to occur the company should accrue the lowest amount of the range. The audit should also inquiry about the accuracy of the litigation estimate. This can be accomplished by complying data obtained from inquiry letter to the clients lawyers, reading of minutes for meetings conducted by management or directors and by evaluating contracts between the client and their customers. The auditor must also evaluate the method of estimating the litigation liability. Finally, the engagement partner must ask Rossi Inc.s management to correct the likely misstatement due to the litigation liabilities account being overstated.