Big Fork Company, a private company that follows ASPE, is preparing its financial statements for the year ended December 31, 2021. It is now February 15, 2022, and the following situations are being reviewed to determine the appropriate accounting treatment:

1. Big Fork is being sued for $3 million for a possible malfunction of one of its products. In March 2021, a customer suffered a serious injury while operating the product. The company is defending itself but it is clear that there was an error in the published operations manual for the product. It is likely that the company will lose this lawsuit, but it is unlikely it will have to pay the full $3 million.

At this point, a reasonable estimate cannot be made of the amount of the expected settlement.

2. Big Fork is being sued for $1.5 million by an employee for wrongful dismissal and defamation of character. The employee was fired on August 2, 2021. The company is vigorously defending itself because the employee had a documented history of poor performance at work.

3. On December 16, 2021, a sales representative from one of the company’s suppliers injured herself on a visit to Big Fork’s offices. She tripped over equipment that had not been properly stored and will be unable to work for several months as a result of her injuries. A $250,000 claim against Big Fork has been filed by the sales representative’s insurance company.

Instructions

For each of the above situations, recommend whether Big Fork Company should (1) make an accrual in its December 31, 2021, financial statements; (2) disclose the situation in the notes to the financial statements; or (3) not report it. Provide a rationale for your recommendations.

What are the potential benefi ts and costs of making an accrual for a contingency as opposed to only disclosing it in the notes to the financial statements?