in the march 2012 meeting of Valleck Corporation\'s board of directors, a questi
ID: 2759614 • 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
Since this is an existing, uncertain situation involving potential loss it is considered a losscontingency. In order for it to be accrued is if it’s both probable that the confirming event willoccur and the amount can be at least reasonably estimated.Since it’s a lawsuit that happened in2011 then we know that the confirming event will occur making it probable and have areasonably estimable. It’s reasonably estimable because of the meeting that happened in theprevious month (February) estimating the cost of a liability to achieve compliance will be$190,000 and to settle the lawsuit for a civil penalty of $205,000. So it should report a liability in addition to the note. The disclosure note should state that accrual was made for both the$190,000 to achieve compliance and $205,000 to settle the lawsuit as of December 31, 2011
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