In March 2013, an explosion occurred at Kirk Co.\'s plant, causing damage to are

Question

In March 2013, an explosion occurred at Kirk Co.'s plant, causing damage to area properties. By May 2013, no claims had yet been asserted against Kirk. However, Kirk's management and legal counsel concluded that it was reasonably possible that Kirk would be held responsible for negligence, and that $4,000,000 would be a reasonable estimate of the damages. Kirk's $5,000,000 comprehensive public liability policy contains a $400,000 deductible clause. In Kirk's December 31, 2012 financial statements, for which the auditor's fieldwork was completed in April 2013, how should this casualty be reported? A. As a note disclosing a possible liability of $4,000,000. B. As a note disclosing a possible liability of $400,000. C. No note disclosure of accrual is required for 2012 because the event occurred in 2013. D. As an accrued liability of $400,000.

Explanation / Answer

B. As a note disclosing a possible liability of $400,000 Per SFAS 5, a loss contingency should he accrued if it is probable that a liability has been incurred at the balance sheet date and the amount of the loss is reasonably estimable. Although this contingency is reasonably estimable, it is not probable. Therefore, no loss is accrued. However, since the contingency is reasonably possible, it will be disclosed in the footnotes to the 12/31/97 financial statements. The possible loss will be disclosed as $150,000. The additional potential liability above the deductible would be covered by the insurance policy, and would not be a loss for Kirk

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