Consider the following hypothetical scenario for Royal Dutch Shell (Shell), a Netherlands-based oil and gas firm. One of Shell’s oil rig platforms collapsed, creating damage to the seafloor as well as environmental damage to surrounding ocean water. Given the following additional information, what amount, if any should Shell recognize as a liability were it applying U.S. GAAP and, separately, IFRS? Shell reports its results in millions of U.S. dollars.
a. Engineers who have examined the damaged site believe that much of the damage will naturally resolve itself, leading them to conclude that there is a 90% chance that damages are zero. They further estimate there is a 10% chance that the forces of nature will not resolve the damages, which will require additional intervention at a cost of $10 million.
b. Upon further analysis, the engineers in part a have revised their assessments. They now believe there is a 51% chance that damages will be $5 million, and a 49% chance that damages will be zero.
c. Environmentalists who have examined the damaged site believe that the damage is extensive and requires immediate cleanup, with the following range of damage estimates: $25 million (probability 20%); $300 million (probability 35%); and $4,000 million (probability 45%).
d. Upon further analysis, the environmentalists in part c have revised their assessments.
They now believe there is an 85% chance that damages will be $5,000 million and a 15% chance that they will be zero.