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Litigation costs are defined as the costs that are incurred by the company because of the proceedings by another party on the said company, and it consists of the fees paid by the company to lawyers to defend the case as well as court fees.

While ascertaining whether or not to record a liability for pending litigation, the following factors are taken into consideration. They are:

• The time frame in which the primary cause for action took place.
• The possibility of an adverse outcome.
• The capability to anticipate the actual amount of loss.

Before recording a liability for threatened litigation, the company must ascertain:

1. The extent of possibility that a case must be filed, and
2. The possibility of an unfavorable result.

The liability must be accrued if both are predictable, the loss can be estimated, and the reason for action is dated on or before the date of financial statements.