Refer to Exercise 14.21. Suppose that the newly hired environmental manager examines the report and makes the following comment: “This report understates the total environmental costs. It fails to consider the costs we are imposing on the local community. For example, we have polluted the river and lake so much that swimming and fishing are no longer possible. I have heard rumblings from the local citizens, and I’ll bet that we will be facing a big cleanup bill in a few years.”
Subsequent to the comment, environmental engineering estimated that cleanup costs for the river and lake will cost $7,500,000, assuming the cleanup efforts are required within five years.
To pay for the cleanup, annual contributions of $1,312,500 will be invested with the expectation that the fund will grow to $7,500,000 by the end of the fifth year. Assume also that the loss of recreational opportunities is costing the local community $3,000,000 per year.
In Exercise 14.21
2015
Settling personal injury claims ........... $ 3,000,000
Treating and disposing of toxic waste ......... 12,000,000
Cleanup of chemically contaminated soil ......... 4,500,000
Inspecting products and processes ............. 1,500,000
Operating pollution control equipment ........ 2,100,000
Licensing facilities for producing contaminants ....... 900,000
Evaluating and selecting suppliers .............. 300,000
Developing performance measures ............. 150,000
Recycling products .................... 187,500
Required:
1. How would this information alter the report in Exercise 14.21?
2. Current financial reporting standards require that contingent liabilities be disclosed if certain conditions are met. Thus, it is possible that Bing may need to disclose the $7,500,000 cleanup liability. Yet, the opportunity cost for the recreational opportunities need not be disclosed to outside parties. Should Bing voluntarily disclose this cost? Is it likely that it would?