(27 points) Demonstrate your ability to explain the objective of financial reporting and to apply the definitions of financial statement elements to identify events and transactions that businesses recognize in their accounting information systems. Limit the length of your response to a maximum of 150 words. Spell-check and grammar-and-style-check your completed response using MS Words tool for this purpose, being sure to correct any matters identified by these checking tools.

Situation
During 20X1, Abacus Corp. received a Notice of Deficiency (NOD) from the IRS indicating the company owes a total of $5 million in additional income taxes for the three preceding taxable years of the company. The company has consulted its tax advisors and plans to defend vigorously the positions it has taken in the affected income tax returns. The companys tax advisors have indicated that it is probable (i.e., more likely than not) that the company will lose on one of the matters that is at issue, which would result in the company paying additional taxes, penalties, and interest amounting to about $1.5 million. The dispute remained unresolved at the date Abacus issued its 20X1 financial statements. First, state whether the company should accrue an expense and accompanying liability related to the NOD in its 20X1 financial statements and, if so, the amount of such accrual. Then, provide your reasoning, by referring to the relevant: Definitions of financial statement elements, Basic principles of financial reporting, and the Desired qualitative characteristics of accounting information Each as discussed in the background paper, Financial Statement Concepts and Financial Reporting.
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