20 employees were severely injured in an explosion of a manufacturing plant in July 2019. Insufficient equipment maintenance and safety procedures were blamed for the incident. As a result, legal proceedings have been started in September seeking damages from the company but it disputes liability. Up to the reporting date (31 December, 2019), the solicitors have advised that it is probable that the company would be found liable. But they have also advised that it is almost impossible to determine the amount of damages for settlement.

What is the appropriate accounting treatment for the event in the financial statements for the year ended as at 31 December, 2019? Justify your answers.

An oil tanker of Mike Ltd., a shipping company, leaked oil and polluted the harbor of Country A. The country has no legislation requiring foreign companies to clean up oil slick. It is estimated that the government of Country A will take four months and $8 million to clean up the oil slick. At the end of reporting period, the company has not yet announced whether it will pay the Country A’ government for the clean-up bill.

Discuss the circumstances under which Mike Ltd. should make a provision for cleaning up the oil slick in the financial statements.