Generics, Inc. is a U. S. GAAP reporter that manufactures and sells generic drugs and has a December 31 year-end. On March 1, 2014, it began selling a drug, Anocyn, which is a generic of Dicital. Dicital was patented by the pharmaceutical company Pharma, Inc. While the patent period on Dicital has not expired, Generics believes that the patent is invalid because the drug currently patented is not sufficiently different from the original drug that Pharma developed, patented, and sold.
As soon as Generics began marketing Anocyn, Pharma sued for patent infringement. As of December 31, 2014, the case is still in the early stages. Generics’ attorneys believe that they will likely win the case, yet they cannot provide an estimated asset as of December 31, 2014. By December 31, 2015, the case has progressed. At this point, Generics’ attorneys believe that Pharma has a viable case. They can only estimate a very broad range for the potential liability of between $ 1 million and $ 3 million. By December 31, 2016, the case has gone to court. Now Generics’ attorneys believe that it is likely that they will lose the case. They currently estimate the loss at $ 4 million.
1. Do you think Generics should accrue the contingency, only disclose the contingency, or not report the contingency at all in its December 31, 2014, financial statements?
2. How should it report the contingency at December 31, 2015, if at all?
3. How should it report the contingency at December 31, 2016, if at all?