Judgment Case 13-9ACC306 - ACC 306 - Week 1 DQ2 - Judgment Case 13-9 - Intermediate Accounting I - AUJudgment Case 13–9 - Valleck Corporation - Loss contingency and full disclosure ● LO5 LO6In the March 2012 meeting of Valleck Corporation’s board of directors, a question arose as to the way a possible obligation should be disclosed in the forthcoming financial statements for the year ended December 31. A veteran board member brought to the meeting a draft of a disclosure note that had been prepared by the controller’s office for inclusion in the annual report. Here is the note:On May 9, 2011, the United States Environmental Protection Agency (EPA) issued a Notice of Violation (NOV) to Valleck alleging violations of the Clean Air Act. Subsequently, in June 2011, the EPA commenced a civil action with respect to the foregoing violation seeking civil penalties of approximately $853,000. The EPA alleges that Valleck exceeded applicable volatile organic substance emission limits. The Company estimates that the cost to achieve compliance will be $190,000; in addition the Company expects to settle the EPA lawsuit for a civil penalty of $205,000 which will be paid in 2014. “ Where did we get the $205,000 figure? ” he asked. On being informed that this is the amount negotiated last month by company attorneys with the EPA, the director inquires, “Aren’t we supposed to report a liability for that in addition to the note? ”Required:Explain whether Valleck should report a liability in addition to the note. Why or why not? For full disclosure, should anything be added to the disclosure note itself?Judgment Case 13-9This is a loss contingency. Valleck can use the information from the Februarynegotiations (occurring after the end of the year) in determining appropriatedisclosure. The cause for the suit existed at the end of the year. Valleck shouldaccrue both the $190,000 compliance cost and the $205,000 penalty because anagreement has been reached making the loss probable and the amount at leastreasonably estimable. These are the two conditions that require accrual of a losscontingency.The disclosure note should also indicate that accrual was made. This can beaccomplished by adding the following sentence to the end of the note:....... Both of the above amounts have been fully accrued as of December