This contingent liability has to be explained in detail in the notes section with references to the law suit, failed bid and the estimated trial date.
a. In the light of the information in the article, do you believe that it is appropriate for Santos to utilize a contingent liability note as the vehicle to provide information about the organization’s potential liability in relation to the mudflow claims?
From the information provided in the article, it is evident that there is a big uncertainty associated with future claims and settlements. It is imperative to note that Santos has already agreed to make a payout of $ US 22.5 million to Minarak in order to protect itself from past, present and future claims. This reduces the possibilities of Santos being held responsible for claims, though the amount paid to Minarak is very low compared to the damage caused by the mudflows. The deal has also reduced the potential risks for a third party buyer indicating that the company is protected from future claims. As the chances for possible obligations are remote, it is not necessary for Santos to disclose contingent liability.
Santos can set aside a certain sun to provide as a relief measure to the affected people of the villages in East Java and establishing new homes for them. Santos can avoid future claims by dealing with the affected directly and providing relief measures. This will reduce the uncertainty regarding the future claims, but at the same time will increase the current obligations. This will reduce the risk for Santos for being taken over by another company. This step also has the added benefit of repairing the company’s brand image in the minds of the people and the government of Indonesia. Hence this cost can be recognized as a provision in the financial statement, as the present obligation as a result of an