in the march 2012 meeting of Valleck Corporation\'s board of directors, a questi
ID: 2463199 • Letter: I
Question
in the march 2012 meeting of Valleck Corporation's board of directors, a question arose as to the way a possible obligation should be disclosed in the forthcoming financial statements for the year end december 31. A veteran board member brought to the meeting a draft of a disclosure note that had been prepared by the controller's office for inclusion in the annual report. Here is the note: On may 9, 2011, the United States Environmental Protection Agency(EPA) issued a notice of violation(NOV) to Valleck alleging violations of the clean air act. Subsequently, in June 2011, the EPA commenced a civil action with respect to the foregoing violation seeking civil penalties of approximated $ 853,000. The EPA alleges that VAlleck exceeded applicable volatile organic substance emission limits. The Company estimates that the cost to achieve compliance will be $190,000; in addition the Company expects to settle the EPA laswsuit for a civil penalty of $ 205,000 which will be paid in 2014.
Where did we get the $205,000 figure? he asked. On being informed that this is the amount negotiated last month by company attorneys with EPA, the director inquires, "Aren't we supposed to report a liability for that in addition to th note?
Required:
Explained whether Valleck should report a liability in addition to the note. Why or Why not? For full disclosure, Should anything be added to the disclosure note itself?
Explanation / Answer
A contingent liability is a potential liability. It depends upon the event in future occuring or not. Only those contingent liabilities are recorded through a journal entry which are both probable and the amount can be estimated Since in the referred case, the contingency is both probable and the amount can also be estimated , Valleck should report a liability in addition to the note The disclosure note is complete and all facts seems to be captured in the note
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