Following are excerpts from the notes that accompanied the financial statements of Hewlett-
Packard for the year ended October 31, 2010. Copyright Levies: As described below, proceedings are ongoing or have been concluded involving HP in certain European Union (''EU'') member countries, including litigation in Germany and Belgium, seeking to impose or modify levies upon equipment [such as multifunction devices (''MFDs''), personal computers (''PCs'') and printers] and alleging that these devices enable producing private copies of copyrighted materials. The levies are generally based upon the number of products sold and the per-product amounts of the levies, which vary. Some EU member countries that do not yet have levies on digital devices are expected to implement similar legislation to enable them to extend existing levy schemes, while some other EU member countries are expected to limit the scope of levy schemes and applicability in the digital hardware environment. HP, other companies and various industry associations have opposed the extension of levies to the digital environment and have advocated alternative models of compensation to rights holders.
Based on industry opposition to the extension of levies to digital products, HP's assessments of the merits of various proceedings and HP's estimates of the units impacted and levies, HP has accrued amounts that it believes are adequate to address the matters described above. However, the ultimate resolution of these matters and the associated financial impact on HP, including the number of units impacted, the amount of levies imposed and the ability of HP to recover such amounts through increased prices, remains uncertain.
Environmental: HP is subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the materials used in its products, and the recycling, treatment and disposal of its products including batteries. In particular, HP faces increasing complexity in its product design and procurement operations as it adjusts to new and future requirements relating to the chemical and materials composition of its products, their safe use, and the energy consumption associated with those products, including requirements relating to climate change. HP products are also subject to product take-back legislation in an increasing number of jurisdictions. HP could incur substantial costs, its products could be restricted from entering certain jurisdictions, and it could face other sanctions, if it were to violate or become liable under environmental laws or if its products become non-compliant with environmental laws. HP's potential exposure includes fines and civil or criminal sanctions, third-party property damage or personal injury claims and clean up costs. The amount and timing of costs under environmental laws are difficult to predict.
HP is party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (''CERCLA''), known as ''Superfund,'' or state laws similar to CERCLA. HP is also conducting environmental investigations or remediation's at several current or former operating sites pursuant to administrative orders or consent agreements with state environmental agencies.
Required
1. Based on the excerpt, how did the company treat the contingency on its financial statements for the year ended October 31, 2010? What criteria were likely used to lead to that treatment?
2. What was the effect on the financial statements of the company's treatment of the contingency?