Module II· EV-Equity BridgeAdvanced
Question
How do you treat litigation reserves and pending claims in the bridge?
Answer
Mechanics
Litigation reserves are handled differently depending on their accounting treatment:
- Reserved litigation (on the balance sheet): debt-like, deduct after-tax from EV.
- Unreserved but probable claims: IFRS reporters must recognize "probable" (>50%) claims and disclose only "possible" ones in the notes. In a valuation, "possible" risks belong as a sensitivity item − not in the base-case bridge.
- Large probable claims (historically, Bayer's glyphosate litigation, VW's diesel litigation, Wirecard investor claims): a concrete estimate with `probability factor × expected value × (1−t)` in the bridge.
Deep diveShow more details
Example — reserved litigation
Inputs:
- Litigation reserve on the balance sheet: $50m
- Tax rate t: 30%
Calculation:
```
Bridge item = reserve × (1 − t) = $50 × 0.70 = $35m
```
Pitch tip
'Outstanding litigation $200m gross exposure × 60% probability × 70% (after-tax) = $84m bridge item − separate sensitivity analysis for tail risk.'