Instructions: You are the Chief Financial Officer (CFO) of a firm that is being sued for damages...

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Accounting

Instructions:
You are the Chief Financial Officer (CFO) of a firm that isbeing sued for damages it caused. It is the end of your fiscalyear, and you are trying to determine the appropriate treatment ofthis matter. Your boss, the Chief Executive Officer (CEO)acknowledges (privately) that your firm is responsible for thedamages and that the judgment will be made against your firm. Yourlegal counsel estimates that the penalty levied by the court willbe in the range of $2 million to $6 million, with a most likelyamount of $4 million. The CEO's posture on the matter is thatbecause of the wide variance in the range of possible outcomes(i.e. penalties levied) that the best thing to do is to simply waituntil the case is settled (next year), and record at that time theactual damages assessed by the court.
Answer the following questions:
What are some possible reasons that the CEO may hold hisviewpoint?
What should be your response to the CEO?
Do you think it is necessary to make an accrual for an estimatedamount of the assessment or settlement? If so, what amount do youthink is appropriate?
Explain. Would your answer to any of the above questions bedifferent if the financials are being prepared under IFRS insteadof U.S. GAAP?

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What are some possible reasons that the CEO may hold his viewpoint The CEO might hold this view since he thinks that the probability of the occurrence of the damages is not precise Secondly he may have the opinion that the real penalty levied by the court is not predictable and might present the balance sheet with a chance of error should the estimate of the loss differ from that of the court What should be your response to the CEO The boss attests to the fact that most likely the case will be made against our company The companys See Answer

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Instructions:You are the Chief Financial Officer (CFO) of a firm that isbeing sued for damages it caused. It is the end of your fiscalyear, and you are trying to determine the appropriate treatment ofthis matter. Your boss, the Chief Executive Officer (CEO)acknowledges (privately) that your firm is responsible for thedamages and that the judgment will be made against your firm. Yourlegal counsel estimates that the penalty levied by the court willbe in the range of $2 million to $6 million, with a most likelyamount of $4 million. The CEO's posture on the matter is thatbecause of the wide variance in the range of possible outcomes(i.e. penalties levied) that the best thing to do is to simply waituntil the case is settled (next year), and record at that time theactual damages assessed by the court.Answer the following questions:What are some possible reasons that the CEO may hold hisviewpoint?What should be your response to the CEO?Do you think it is necessary to make an accrual for an estimatedamount of the assessment or settlement? If so, what amount do youthink is appropriate?Explain. Would your answer to any of the above questions bedifferent if the financials are being prepared under IFRS insteadof U.S. GAAP?