Question

You are auditing Rodgers and Company. You are aware of a potential loss due to noncompliance with environmental regulations. Management has assessed that there is a​ 40% chance that a​ $10M payment could result from the​ non-compliance. The appropriate financial statement treatment is to
A. since there is less than a​ 50% chance of​ occurrence, ignore.
B. since there is greater that a remote chance of​ occurrence, accrue the​ $10 million.
C. accrue a​ $4 million liability.
D. disclose a liability and provide a range of outcomes.

Answer 1

Answer:

D. disclose a liability and provide a range of outcomes.

Explanation:

As there are 40% chances to the outcome that liability will occur, it is not nominal to be ignored. And therefore, it shall be shown in the balance sheet, as a note, with different possibilities and their expected results.

As the amount attached is huge and that the company shall not ignore such a coming liability, as if it do not happen, it can be reversed, and if it does the company shall be ready to have the liability in case of any default.