Asbestos Inc. manufactures heat shields for use in oil refineries. Management has prepared financial statements for the year ended 2008 for review by the auditors. The audit team has questioned several items in the financial statements and has asked for your advice concerning the proper treatment of these items. Each of the items being questioned follows.
(a) In November 2008, attorneys for current and former employees of Asbestos Inc. filed a class action lawsuit, alleging that exposure to asbestos has caused significant medical problems. Attorneys for Asbestos Inc. are uncertain as to the outcome of the case. However, similar lawsuits against other firms in the asbestos industry have resulted in significant payments by the employer.
(b) On January 12, 2009, a fire at a production facility damaged a number of adjacent buildings (owned by other businesses). Asbestos’ insurance policy does not cover damage to the property of others. Insurance companies for those other businesses have billed Asbestos for the estimated cost of $2.4 million required to restore the damaged buildings.
(c) One of Asbestos’ production plants is located on the shores of Lake Obewankanobe. The lake has been rising for a number of years, and the company has installed dikes to prevent flooding. The dikes are currently operating at or near capacity. Weather forecasters have predicted that the lake will rise another eight inches this coming summer. If this occurs, significant damage will likely result from stressing the dikes beyond capacity.
(d) A national magazine printed an article regarding the dangers of asbestos and specifically named Asbestos Inc. as a “killer of innocent victims.” Attorneys for Asbestos filed suit for libel and were awarded $1.3 million in damages on December 16, 2008. The magazine has indicated it would appeal the verdict.
Instructions:
Determine how each of these events should be disclosed in the financial statements of Asbestos Inc. for the year ended December 31, 2008. Provide support for your position.