Lawsuits are one type of contingent loss, where the loss is contingent upon an adverse settlement or verdict in the case. Domestic tobacco companies are currently facing lawsuits from several states. The tobacco litigation loss contingency should be accrued if a loss is probable and can be estimated. Probable and estimable are difficult concepts that offer managers a fair degree of discretion.
Required:
a. List two reasons why the managers in this case might resist quantification and accrual of a loss liability.
b. Describe a circumstance when managers might be willing to accrue a contingent loss that they had earlier resisted accruing.
