In a newspaper article of 1 May 2019 entitled ‘KPMG settles Discovery Metals class action’ (in The Australian Financial Review, by Edmond Tadros, p. 30) it was reported that the ‘Big 4’ consulting firm KPMG settled a class action with shareholders of an organisation known as Discovery Metals.

The background to the action was that there had been a takeover offer in which the shareholders had been offered $1.70 a share. However, a valuation of the assets of Discovery Metals by KPMG led KPMG to advise the board of directors of Discovery Metals that the figure of $1.70 a share was ‘not fair and reasonable’ because the fair value for a Discovery Metals share was between $1.74 and $2.22. It was reported that the board subsequently advised shareholders to reject the offer, based on the advice of KPMG, and the offer lapsed a month later due to insufficient shareholder support. Discovery Metals subsequently went into liquidation in June 2015, leaving nothing for the shareholders.

The shareholders are reported to have alleged that KPMG provided misleading advice to the board of directors by inflating the value of the company’s principal asset by as much as 40 per cent. The shareholders were also reported to have alleged that had KPMG not applied the faulty valuation, it would have advised the board that the takeover bid was fair and reasonable.

According to the article, KPMG denied the allegations and agreed to the in-principle settlement ‘without any admission of liability’. The shareholders, in turn, agreed to release KPMG Advisory from all further related claims.

REQUIRED

Assuming that KPMG was a reporting entity and required to produce general purpose financial reports, explain when KPMG would have first disclosed information about the lawsuit and how it would disclose it. Once KPMG agreed to settle the claim, how would the settlement be disclosed in the financial statements?