Question

Amazon Inc. has been sued for following three alleged infringements of law: (1) Unauthorized use of a trademark; the claim is for $100 million (2) Nonpayment of end-of-service severance pay and gratuity to 5,000 employees who were terminated without Amazon Inc. giving any reason; the class action lawsuit is claiming $3 million (3) Unlawful environmental damage for dumping waste in the river near its factory; environmentalists are claiming unspecified damages as cleanup costs (4) Legal counsel is of the opinion that not all the legal cases are tenable in law and has communicated to Amazon Inc. this assessment of the three lawsuits: (5) Lawsuit 1: The chances of this lawsuit are remote. (6) Lawsuit 2: It is probable that Amazon Inc. would have to pay the displaced employees, but the best estimate of the amount that would be payable if the plaintiff succeeds against the entity is $2 million. (7) Lawsuit 3: There is no current law that would compel the entity to pay for such damages. There may be a case for constructive obligation, but the amount of damages cannot be estimated with any reliability. Required: What should be the provision that Amazon Inc. should recognize or the contingent liability that it should disclose in each of the lawsuits, based on the assessments of its legal counsel?

Answer 1

The International Financial Reporting Standards developed standards can

be implemented to ascertain the provisions and disclosures to be made.

The correct responses are;

According to the financial reporting standard, the contingent liability that

Amazon Inc. should disclose and the provision that Amazon Inc. should

recognize, based on the legal consent are;

Lawsuit 1: It is not required to make provision or disclosure because the

probability of the lawsuit progressing is remote and therefore, the

Company will not be required to payout money or lose economic benefits.

Lawsuit 2: The likelihood of the Company having pay the displaced

employees is high however, the amount payable is $2 million, and

therefore, a provision of $2 million is required in the financial reporting.

Lawsuit 3: The Company is not legally obliged to pay for or perform the

cleanup, but based on the relationship between the Company's waste

location, the river, and the community, there is a constructive obligation,

the amount of which cannot be determined with reliability.

Therefore, there is a requirement for disclosure as a contingent liability,

and not a provision as the claim cannot be classified as a provision.

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