Question

After the end of the 2021 fiscal year but before financial statements were issued, EPK Company learned that an arbitrator had made a $10 million judgment in a litigation judgment against it. The claim had been made in 2020 for alleged defects of products sold in 2019. Prior to learning of the judgment, EPK had not accrued any litigation loss, and does not plan to appeal. For the 2021 fiscal year, EPK should:

A. Disclose the potential for a judgment in the notes, but not indicate the amount, since the judgment was made after fiscal year end.
B. Disclose in the notes that a $10 million judgment was made after fiscal year end.
C. Accrue a $10 million liability and explain it in a note to the financial statements.
D. Do nothing relative to the contingency.

Answer 1

After the end of the 2021 fiscal year but before financial statements were issued, EPK Company learned that an arbitrator had made a $10 million judgment in a litigation judgment against it. The claim had been made in 2020 for alleged defects of products sold in 2019. Prior to learning of the judgment, EPK had not accrued any litigation loss, and does not plan to appeal. For the 2021 fiscal year, EPK should:

B. Disclose in the notes that a $10 million judgment was made after fiscal year end.

The reason for this choice is that, even though the judgment was made after the end of the fiscal year, it is a significant event that occurred before the financial statements were issued. Therefore, it is important to disclose the information in the notes to provide a transparent and accurate picture of the company's financial situation.