ACC306 - ACC 306 - Week 1 DQ2 - Judgment Case 13-9 - Intermediate Accounting I - AU
Judgment Case 13–9 - Valleck Corporation - Loss contingency and full disclosure ● LO5 LO6
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 ended 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 approximately $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 lawsuit 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 the EPA, the director inquires,
“Aren’t we supposed to report a liability for that in addition to the
note? ”
Required:
Explain 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?
