Hewlett-Packard’s Contingent Liability Following is an excerpt from Hewlett-Packard’s notes that accompanied its fi nancial statements for the year ended October 31, 2008:

Schorsch v. HP is a consumer class action fi led against HP on October 28, 2003 in Illinois state court alleging that HP has included an electrically erasable programmable read only memory (EEPROM) chip in certain of its LaserJet printers that prematurely advises the user that the drum kit needs replacing in violation of Illinois state law. The plaintiffs subsequently fi led an amended complaint seeking to expand the class from purchasers of drum kits to purchasers of all HP printer consumables that contain EEPROM chips. The most current amended complaint seeks certifi cation of an Illinois-only class and seeks unspecifi ed damages, attorneys’ fees and costs.

Rich v. HP is a consumer class action fi led against HP on May 22, 2006 in the United States District Court for the Northern District of California. The suit alleges that HP designed its color inkjet printers to unnecessarily use color ink in addition to black ink when printing black and white images and text. The plaintiffs seek injunctive and monetary relief on behalf of a nationwide class.

HP is subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of its products and the recycling, treatment and disposal of its products including batteries. In particular, HP faces increasing complexity in its product design and procurement operations as it adjusts to new and future requirements relating to the chemical and materials composition of its products, their safe use, the energy consumption associated with those products and product take-back legislation. HP could incur substantial costs, its products could be restricted from entering certain jurisdictions, and it could face other sanctions, if it were to violate or become liable under environmental laws or if its products become non-compliant with environmental laws. HP’s potential exposure includes fi nes and civil or criminal sanctions, thirdparty property damage or personal injury claims and clean up costs. The amount and timing of costs under environmental laws are diffi cult to predict.

Required 1. Based on the excerpt, how did the company treat the contingency on its fi nancial statements for the year ended October 31, 2008? What critieria were likely used to lead to that treatment?

2. What was the effect on the fi nancial statements of the company’s treatment of the contingency?

Making Financial Decisions AppendixLO1