The following information appeared in the annual reports of Borden, inc., Exxon Corporation, and Visa Inc., Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Environmental accruals are routinely reviewed on an interim basis as events and developments warrant and are subjected to a comprehensive review annually during the fiscal fourth quarter. The Company and the Combined Companies have each accrued approximately $26 million (including those costs related to legal proceedings) at December 31, 2000 and 1999, for probable environmental remediation and restoration liabilities. This is management€™s best estimate of these liabilities. Based on currently available information and analysis, the Company believes that it is reasonably possible that costs associated with such liabilities may exceed current reserves by amounts that may prove insignificant, or by amounts, in the aggregate, of up to approximately $16 million. [Excerpt from the company€™s 2000 annual report.1

For the quarter ended June 30, 2012, the Company recorded a litigation provision of $4.1 billion, which increased its total reserve for the covered litigation from $285 million to $4.4 billion, to reflect the class plaintiffs€™ Settlement Agreement and the resolution of the Individual Plaintiffs€™ claims. [Excerpt from the company€™s 2012 annual report. Author Note: The Court granted preliminary approval of the Settlement Agreement on November 9, 2012.]

Required
1. What is a loss contingency, and why is it disclosed in financial statements? Which of the preceding examples represents a recognized loss contingency?
2. Borden has a $26 million liability on its 2000 balance sheet for €œprobable environmental remediation and restoration.€ But the company says actual remediation and restoration costs could be up to $16 million more than this amount. Why doesn€™t Borden€™s balance sheet liability include the additional $16 million?
3. Why doesn€™t Exxon report a dollar amount for its litigation cases? Does the lack of a specific dollar amount in Exxon€™s cases mean that stock analysts will just ignore the litigation when valuing the company? Why or why not?
4. ¡n its 2002 annual report., Exxon (now ExxonMobil) had more to say about the Exxon Valdez incident:
On September 24, 1996, the United States District Court for the District of Alaska entered a judgment in the amount of $5.058 billion. The District Court awarded approximately $19.6 million in compensatory damages to plaintiffs, $38 million in prejudgment interest on the compensatory dam ages, and $5 billion in punitive damages The District Court stayed execution on the judgment pending appeal.. . . ExxonMobil appealed the judgment. On November 7, 2001, the United States Court of Appeals for the Ninth Circuit vacated the punitive damage award as being excessive under the Constitution and remanded the case to the District Court for it to determine the amount of the punitive damage award.. . . On December 6, 2002, the District Court reduced the punitive damages from $5 billion to $4 billion. ...
Based on the information provided, when did Exxon first report a balance sheet liability for the Exxon Valdez litigation? What was the amount of that liability?
5. In October 2007, the U.S. Supreme Court agreed to decide whether Exxon should be required to pay $2.5 billion in punitive damages to oil spill victims. Explain how the Court€™s willingness to hear the Exxon appeal affects the company€™s accounting for this contingentliability.

Transcribed Image Text:

2011 (in milions) Balance at Octoher 1 Provision for unsettled legal matters Provision for settled legal matters Reclassification of settled matters) Interest accretion on settled matters Payments on settled matters Balance at September 30 2012 425 4,100 697 12 (140) $4,386 (302 $425 Reclassification of amount previously recorded in accrued liabilities