In March 2011, an explosion occurred at Kirk Co.'s plant, causing damage to area properties. By May 2011, no claims had yet been asserted against Kirk. Kirk's management and legal counsel, however, concluded that it was reasonably possible that Kirk would be held responsible for negligence, and that $4,000,000 would be a reasonable estimate of the damages. Kirk's $5,000,000 comprehensive public liability policy contains a $400,000 deductible clause. In Kirk's December 31, 2010 financial statements, for which the auditor's fieldwork was completed in April 2011, how should this casualty be reported?
As a note disclosing a possible liability of $4,000,000.
As an accrued liability of $400,000.
As a note disclosing a possible liability of $400,000.
No note disclosure of accrual is required for 2010 because the event occurred in 2011.