The May 8, 2008, edition of the Wall Street Journal contains an article by Heather Won Tesoriero titled “Oil Firms Settle Claims in MTBE Leak Cases.”
Instructions
Read the article and answer the following questions.
(a) In addition to paying $423 million in cash, the oil companies agreed to pay cleanup costs that arise in the next 30 years. What accounting issues arise for the oil companies from the promise to pay in the future?
(b) Discuss the accounting criteria that the oil companies must apply toward their promise to pay future costs.
(c) What accounting challenges do the companies face in trying to apply the accounting criteria to the promise to pay in the future? What challenges are faced by investors who are analyzing the oil companies?
(d) Exxon Mobil Corp. chose to not settle. Instead it will go to court to dispute the charges. Discuss the implications of this decision for Exxon Mobil’s accounting versus that of the companies that chose to settle the case.