For each of the following situations, determine whether the company should (a) report a liability on the balance sheet, (b) disclose a contingent liability in the footnotes, or (c) not report the situation. Justify your conclusions.
1. A company that manufactures mountain climbing equipment introduces a new type of climbing rope. Past experience demonstrates that lawsuits will be filed as soon as the new rope is involved in any serious climbing accidents. The company believes it is highly probable that at least one jury will award damages to climbers injured in an accident, but it is unable to estimate the amount of any payout.
2. An analyst puts out a report that claims a company’s best-selling product may infringe on another company’s patent. If the other company discovers the infringement and files suit, which is deemed to be highly unlikely, the company could lose millions.
3. As part of a large construction project to build a new dam, your company has polluted a nearby river. Under state law, you must clean up the river once the dam project is complete. The dam project will take eight to ten years to complete. Current estimates indicate that it will cost $7 million to clean up the river.
4. Your company sells coffee and is being sued by a customer who spilled hot coffee on her lap while driving. Due to a faulty lid issue that you are aware of, the probability of the customer winning is deemed to be probable, but the amount of any loss cannot be reliably estimated.
5. A patient is unhappy with the quality of a hip replacement he received. The hospital believes that the patient is being unreasonable but has informed the patient that it will do additional procedures on the hip at no charge to the patient. The procedures will cost the hospital $50,000.