Tobacco Group Inc. (TGI) is in the consumer-packaged goods industry. Its shares are widely held, and key shareholders include several very large pension funds. In the current year, 59% of the net revenues and 61% of operating income came from tobacco product sales. Due to the health risks related to the use of tobacco products, the industry is increasingly regulated by the government, and the company is implicated in substantial tobacco related litigation. During the past three years, the company entered into agreements with the government to settle asserted and unasserted healthcare recovery costs and other claims. The agreements, known as the Government Settlement Agreements, call for payments by the domestic tobacco industry into a fund in the following amounts:

Current year $10.9 billion

Following four years $8 billion each year

Thereafter $9 billion each year

The fund will be used to settle claims and aid tobacco growers. Each companys share of these payments is based on its market share, and TGI records its portion of the settlement costs as cost of goods sold on shipment. These amounts may increase based on several factors, including inflation and industry volume. In the past three years, the company has accrued costs of more than $5 billion each year. Another significant class action lawsuit is still in process. Last year, the jury returned a verdict assessing punitive damages against various defendants, and TGI was responsible for $74 billion. The company is contesting this, and the lawsuit continues. As a result of preliminary judicial stipulations, the company has placed $500 million in a separate interest-bearing escrow account. This money will be kept by the court and distributed to the plaintiffs regardless of the outcome of the trial. The company also placed $1.2 billion in another escrow account, and this amount will be returned to the company if it wins the case. Instructions Assume the role of a financial analyst and discuss the related financial reporting issues. Specifically, note alternative accounting treatments for each issue and recommend how each issue should be treated in the financial statements.