4.4 Determinable and Indeterminable Mix of Loss Recovery and Gain Contingency Models

Under the determinable mix model, the probable recovery proceeds equal to the amount of the recognized loss should be accounted for by using the loss recovery model. Any expected proceeds in excess of the recognized loss should be accounted for as a gain contingency. When there is no clear evidence that the amount of the proceeds is a recovery of previously recognized losses or incremental costs (i.e., there is no direct linkage) or the amount of the loss or costs previously incurred is not objectively quantifiable (i.e., specifically identifiable), the gain contingency model would be applied to the entire amount of the recovery proceeds (also referred to as the indeterminable mix model). The determinable mix model, which encompasses both the loss recovery model and the gain contingency model, and the indeterminable mix model, which results in the application of the gain contingency model to probable recovery proceeds, are further illustrated below.

Application of the gain contingency model for the entire amount of the probable proceeds is illustrated below.

The example below illustrates the application of the indeterminable mix model, while Example 4-5 illustrates the application of the determinable mix model.

Example 4-4

Indeterminable Mix of Loss Recovery and Gain Contingency Models

Company T joins a class action lawsuit against Credit Card Company Y because Y has overcharged for various credit card transactions over the past 10 years. Credit Card Company Y and T enter into a settlement agreement, subject to the final approval of the claims administrator, for an estimated amount of $35 million payable to T over the next 5 years. Company T concludes that it is probable that it will receive at least $35 million from the settlement. The settlement agreement includes the recovery of actual and estimated overcharges, punitive damages, payment to avoid further cost of litigation, and payment to restore a collaborative business relationship.

The recovery of the overcharges amount is based on actual and estimated overcharges over the past 10 years. Company T is unable to determine a direct linkage between (1) what represents cost recovery of the previously recognized overcharges and (2) punitive damages. Further, Y contends in all legal proceedings that the lawsuit is without merit and that T has not previously incurred any losses. From Y’s perspective, it is settling the lawsuit to restore a collaborative business relationship rather than to repay T’s incurred losses. Accordingly, the amount of the loss previously incurred is not objectively quantifiable.

For T to characterize an amount as a loss recovery, the amount should represent the reimbursement of specific, incremental, identifiable costs that were previously incurred. Company T determines that it is unable to objectively determine how much of the settlement represents recovery of previously recognized overcharges. Therefore, T applies the gain contingency model to the entire amount of the settlement. Uncertainties remain regarding the settlement’s approval; therefore, T should defer recognition of the gain until sufficient information is available for T to conclude that the gain is realized or realizable.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.