Target experienced a security breach on January 31, 2014 and estimated potential losses between $6.5 million and $8.5 million. According to accounting standards, Target should accrue the minimum estimated loss of $6.5 million on its financial statements as the loss was probable and reasonably estimable. Target also believes it will collect $10 million from a lawsuit but this potential gain cannot be recognized until realized. Any updates to estimated losses after the financial statement date will be recorded in the following period.
Target experienced a security breach on January 31, 2014 and estimated potential losses between $6.5 million and $8.5 million. According to accounting standards, Target should accrue the minimum estimated loss of $6.5 million on its financial statements as the loss was probable and reasonably estimable. Target also believes it will collect $10 million from a lawsuit but this potential gain cannot be recognized until realized. Any updates to estimated losses after the financial statement date will be recorded in the following period.
Target experienced a security breach on January 31, 2014 and estimated potential losses between $6.5 million and $8.5 million. According to accounting standards, Target should accrue the minimum estimated loss of $6.5 million on its financial statements as the loss was probable and reasonably estimable. Target also believes it will collect $10 million from a lawsuit but this potential gain cannot be recognized until realized. Any updates to estimated losses after the financial statement date will be recorded in the following period.
FROM: Beth Nduthu. DATE: March 1, 2014 SUBJECT: Impact of the Security breach on January 31, 2014 financial statements. This memo discusses how to account for the potential losses arising from the security breach of targets computer system. As of today target has already reimbursed credit card companies $2 million in losses and has received a total of $5 million in claims. The company estimates a total loss of about $10.5 million. Target also believes they will collect $10 million from a lawsuit that they have filed against the company that designed their internet security system. I will discuss the criteria required to accrue these contingencies, how to determine the amount to accrue and which estimate to use. Contingency A contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an entity that will ultimately be resolved when one or more future events occur or fail to occur (ASC 450-10-20) Loss Contingency According to ASC Section 450-20-25-2, an estimated loss from a loss contingency should only be accrued by a charge to income only if the following two conditions are met: a. Information available before the financial statements are issued or are available to be issued indicates that it is probable (likely) that a liability had been incurred at the date of the financial statements (the end of the most recent accounting period for which financial statements are being presented) and, b. It should be possible to reasonably estimate the amount of the loss. The loss from the security breach satisfies both of the above conditions in that it is known that a liability has been incurred at the date of the financial statement i.e. January 31, 2014 and the amount is reasonably estimated to be between $6.5 million and $8.5 million. This information is available before the financial statements are issued. Amount to Accrue from a loss contingency The amount of the potential loss from the security breach is reasonably estimable i.e. it is estimated to be between $6.5 million and $8.5 million. According to ASC section 450-20-30, if no amount within a range of possible loss appears at the time to be more likely than any other amount within the range, the minimum amount shall be accrued in the financial statements. In this case, we shall accrue $6.5 million since it is the minimum amount. The possible additional loss should be disclosed in the notes. Target shall disclose possible additional loss of up to $2 million. Gain contingency Gain contingencies should not be accrued or reported in the financial statements because to do so might be to recognize revenue before its realization. (ASC 450-30-25). Material ones are disclosed in notes to the financial statements but care should be exercised to avoid misleading implications as to the likelihood of realization (ASC 450-30-25). In this case, the $10 million that target believes will collect from their lawsuit will not be reflected in the financial statements but will be disclosed in the notes. The gain should only be recognized only when realized. Events after the date of financial statements After the date of the financial statement but before they are issued, Target has received $5 million in claims, and have now come up with a new estimate. The Company estimates the range to be between $6 million and $ 7.5million over the next fiscal year with $7 million being the most likely amount. This new estimate of liability will not be accrued since it was not incurred at January 31, 2014 the date of the financial statements. (ASC 450-20-25-6).This new loss liability shall be charged to the income in January 31, 2015 financial statements. Journal entries Target should have made the following journal entries by January 31, 2014. Loss Due to Security breach $2 million Cash $2 million To record cash reimbursed to credit card companies Loss Due to Security breach $4.5 million Contingent Liability $4.5 million To accrue the least amount of estimated losses due to security breach. The security breach reduces the Jan 31, 2014 net income by $6.5 million since it is an expense charged to the income. It also reduces the revenues by an estimated amount of $8 million in lost sales. The estimated loss in sales will not be reflected in the financial statements but Target should disclose it in the notes to financial statements. The gain contingency will not be accrued in 2013 fiscal year but Target will be able to recognize it when realized.