ACCT 3304 · Quantification of Loss

Led by Felix Aubrey Sharpley Simulacrum

1. Module 4 ○ Open

   Quantification of Loss

   Led by Felix Aubrey Sharpley Simulacrum

   The question

   Quantification of loss — the central technical work of most forensic engagements. The module covers the major quantification frameworks (direct loss, lost profits, diminution in value, restitution, reasonable royalty), the *but-for* counterfactual construction for lost-profits work, the role of contemporary forecasts and industry data as evidence, the discounting of future losses to present value, the mitigation analysis required by law, and sensitivity analysis as the standard practice. The worked example builds a five-year lost-profits quantification for a distribution-agreement breach.

   Outcome

   The student can build a lost-profits quantification using the but-for counterfactual approach; can apply discounting to future losses; can perform sensitivity analysis on the key inputs; and can articulate the difference between direct loss, lost profits, diminution, and reasonable royalty. (Quantification of loss)

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   Practice scenarios

   Quantifying Lost Profits in a Distribution-Agreement Breach

   You quantify lost profits over five years for a UK distributor whose £8.2m-revenue exclusive distribution agreement was terminated in breach, including a but-for revenue projection, mitigation analysis on substitute product lines, and sensitivity analysis on growth and contract-term assumptions. The work tests whether you can build a defensible quantum number under challenge from the defendant's expert.

   Your goals

   • Build the but-for revenue projection: 2023 £11.0m (10% growth); 2024 £12.3m; 2025 £13.8m; 2026 £15.4m; 2027 £17.3m. Sensitivity: also calculate at 8% and 12% growth.
   • Apply the historical gross margin (32%) to project but-for gross profit by year.
   • Subtract the product-line-specific operating costs (the *avoidable costs* — staff and marketing genuinely tied to these products): £1.4m/year × 5 = £7.0m.
   • Calculate but-for operating profit by year: 2023 £2.1m; 2024 £2.5m; 2025 £3.0m; 2026 £3.5m; 2027 £4.1m. Total but-for profit £15.2m.
   • Calculate actual operating profit on the substitute lines: 22% margin × volume profile × less avoidable costs = approximately £6.5m over 5 years (lower margin, slower ramp).
   • Net loss before discounting: £15.2m − £6.5m = £8.7m.
   • Apply discount: assume 5% discount rate for future periods; PV adjustment reduces total to ~£7.6m.
   • Apply a *contract-term* sensitivity: the agreement had no fixed term but could have been terminated on 12 months' notice in good faith; this affects the recoverable period; calculate the alternative on a 1-year-only loss basis (~£1.8m) for the court's consideration.
   • Frame the quantification as a 2,000-word section of the expert report including sensitivity analysis and explicit assumption disclosure.

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