Question:
You are the Chief Financial Officer (CFO) of a firm that is being sued for damages it caused. It is the end of this fiscal year, and you are trying to evaluate the appropriate treatment of this matter. Your boss, the Chief Executive Officer (CEO) acknowledges privately that your firm is responsible for the damages and that the judgment can be made against your firm. Your legal counsel evaluates that the penalty levied by the court can be in the range of $2 million to $6 million, with a most likely amount of $4 million.
The CEO's position on the matter is that because of the wide variance in the range of probable outcomes (i.e. penalties levied) that the best thing to do is to simply wait until the case is settled, and record at that time the actual damages assessed by the court.
What are some probable reasons that the CEO may hold his viewpoint? What could be your response to the CEO? Do you think it is essential to make an accrual for an estimated amount of the assessment or settlement? If so, what amount do you think is appropriate? Describe.