Hamilton Airlines is faced with two situations that need to be resolved before the financial statements for the company's year ended December 31, 2014, can be issued.
1. The airline is being sued for $4 million for an injury caused to a child as a result of alleged negligence while the child was visiting the airline maintenance hangar in March 2014. The suit was filed in July 2014. Hamilton's lawyer states that it is likely that the airline will lose the suit and be found liable for a judgement costing anywhere from $400,000 to $2 million. However, the lawyer states that the most probable judgement is $800,000.
2. On November 24, 2014, 26 passengers on Flight No. 901 were injured upon landing when the plane skidded off the runway. On January 11, 2015, personal injury suits for damages totalling $5 million were filed against the airline by 18 injured passengers. The airline carries no insurance. Legal counsel has studied each suit and advised that it can reasonably expect to pay 60% of the damages claimed.
Instructions
(a) Prepare any disclosures and journal entries for the airline required by
(1) ASPE, and
(2) IFRS in the preparation of the December 31, 2014 financial statements.
(b) Ignoring the 2014 accidents, what liability due to the risk of loss from lack of insurance coverage should Hamilton Airlines record or disclose? During the past decade, the company has experienced at least one accident per year and incurred average damages of $3.2 million. Discuss fully.