Case 14-07 Evade Pays Up

In: Business and Management

Submitted By crystalcheung
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According to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 450-20-25-02: “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 available before the financial statements are issued or are available to be issued indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. Date of the financial statements means the end of the most recent accounting period for which financial statements are being presented. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.
b. The amount of loss can be reasonably estimated.”
“Further, even losses that are reasonably estimable shall not be accrued if it is not probable that an asset has been impaired or a liability has been incurred at the date of an entity's financial statements because those losses relate to a future period rather than the current or a prior period.

Although the amount of the uncollected or remitted sales taxes payable could be reasonably estimated to be $50 million, the eVade Company considers the risk of detection not to be probable in this case. Thus, the sales taxes due shall not be accrued as liability in the current year’s financial statement at December 31, 2011.
Moreover, ASC450-20-50-05 indicates that: “Disclosure is preferable to accrual when a reasonable estimate of loss cannot be made. For example, disclosure shall be made of any loss contingency that meets the condition in paragraph 450-20-25-2(a) but that is not accrued because the amount of loss cannot be reasonably estimated (the condition in paragraph 450-20-25-2[b]). Disclosure also shall be made of some loss contingencies that do not meet the condition in…...

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