SURG (or any other company) is required to create a liability to cover possible damages if two criteria are met:
1. SURG deems it probable that a loss will occur, 2. SURG can reasonably estimate the resulting damages.>>
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Allow me to refine this because the answer provided stated "if two", when it really is only the first you mentioned. It is the rule of conservative accounting that says if you know of a potential liability then you must book a reserve as contigent for that liability. Your #2 is proper inclusion of "reasonable" for the estimate, but not an excuse to book $0 if someone can not determine if the potential is $5million or $35million. "Reasonable" in many situations is the maximum possible liability discounted (as determined by unbias expert advice) by the likelihood of occurance.
As I've posted a month ago and recently repeated, Synergetics has not yet recognize a liability of a "material" (significant) amount. For a company with ~$40mm in revenues and earnings ~10% of that, do the math on what would be a "material" amount and compare that to IRIX's comments and expenses.
Furthermore, year-end financials are audited and the independent auditors must also provide opinion. Their standard practice is to review open legal issues (as disclosed to them by the company) for potential liability and ensure they are properly recognized on the company's balance sheet. As Synergetics recently completed their year-end, the next release of financial statements will include this opinion.