During the global financial crisis in July 2008, National Australia Bank (NAB) was exposed to collateralised debt obligations (CDO). Consequently, NAB wrote down $1 billion associated with these risky instruments, with its share price plummeting and shareholders losing $450 million. A shareholder class action was initiated against NAB. The class action was settled in 2010, with NAB agreeing to pay $115 million — a fraction of the loss to shareholders. The lawsuit claimed NAB failed to disclose the extent of its subprime investments. Yet, despite the settlement, NAB denied liability and advised that the settlement was reached on a ‘commercial basis’ only (Wilkins 2012).

Required
(a) Referencing the Conceptual Framework, discuss whether NAB should record a liability when a lawsuit is launched.
(b) Access the 2010 and 2011 NAB annual reports and identify how NAB disclosed and/or recognised the lawsuit.
(c) The Conceptual Framework refers to a present obligation being a legal or constructive obligation. With reference to an example, describe your understanding of a constructive obligation.
(d) Identify the changes, if any, to the liability definition and recognition criteria as a result of the revised Conceptual Framework.