Coastal Oil has three pending legal cases against it for environmental damages d
ID: 2534570 • Letter: C
Question
Coastal Oil has three pending legal cases against it for environmental damages due to a recent spill. The company's legal counsel has determined that it is probable the company will lose a suit by the state for $8,100,000 to cover cleanup costs. It advises that there is a remote chance of losing a claim by a neighborhood association for $1,100,000 due to emotional distress over the condition of the coastline. The third claim of $600,000 for health issues arising from suspected water contamination is considered reasonably possible to be won by the claimants. The amount that Costal should record in its accounting records related to these suits is:
Explanation / Answer
As per IAS 37, Provision should be only recorded when
Claim 1 and claim 3 satisfy all the conditions while in case of claim 2 payment is not probable.
Hence, Claim 1 of $8,100,000 and Claim 3 of $600,000 totaling $8,700,000 should be recorded