The cigarette industry is subject to litigation for health hazards posed by its products. The industry has been negotiating a settlement of these claims with state and federal governments. As the CFO for Philip Morris, one of the larger firms in the industry, what information would you report to investors in the annual report on the firm's litigation risks? How would you assess whether the firm should record a liability for this risk, and if so, how would you assess the value of this liability? As a financial analyst following Philip Morris, what questions would you raise with the CEO over the firm's litigation liability?
What information would be reported to investors in the annual report on litigation risks?
Litigation risks facing Philip Morris can result in financial effect on the company in case of settlements thus need to determine effect on financial statements. FASAB (1998) defines a contingent liability as an existing situation that involves uncertainty on whether a company will receive a gain or incur a loss thus is loss contingency and gain contingency. Uncertainty in the situation is resolved when a future event occurs or fails to occur.
When there exists a loss contingency then the probability that a future event will confirm the situation ranges from probable to remote. Probable means that the future event confirming the situation is more likely than not to occur. Reasonably possible occurs when chances of future confirming event occurring is more than remote and less than probable. When a contingency liability has remote likelihood then chance of future confirming event occurring is ...
A report to investors in the annual report on firm's litigation risks are examined. The information that would be reported is provided.