ABC Ltd is listed on the Imaginary Stock Exchange. Its reporting currency is Imaginary Dollars (I$). ABC Ltd has been experiencing some financial troubles lately. However, management believes that this is a temporary phase and that it will soon return to normal times. Cash flow has been declining for the past two years, and ABC Ltd has been consistently falling behind on contractual payments to suppliers for raw materials. Consequently, the suppliers have sued ABC Ltd over unpaid bills. The court is expected to rule in favour of the suppliers, and ABC Ltd would be liable to pay I$40 million in fines. The management of ABC Ltd argues that there is a low probability of such a ruling, and have not recognised this liability in the books. Assume that the tax rate is 30%.

Do you agree with ABC Ltds financial reporting choice? If not, what adjustments will you make to the financial statements?