Effective Writing 10th Edition by Claire May,Gordon May

Exercise 4

American Petroleum Company (AP Oil) owns and operates deep-water drilling rigs in international waters off the coast of Euromania, a Western European country. Several months ago, it experienced a disastrous explosion and fire at one of its rigs that resulted in a monumental oil spill, which has yet to be contained. The spill is expected to have dire effects on hundreds of miles of the Euromanian coastline, putting untold thousands of people in fishing, tourist, and supporting industries out of work. Because the disaster occurred in international waters, the ability of the Euromanian courts to impose liability judgments against AP is probably limited to its ability to seize whatever AP assets are located within its jurisdiction. These assets are carried on AP's books at $20 billion. In addition, Euromanian law limits liability in such cases to a maximum of €96 million ($115 million). However, out of a feeling of ethical obligation and in an effort to salvage the good name of the company, AP's Board of Directors has agreed to honor all damage claims in an unlimited fashion. It is estimated that the value of such claims could reach €83 billion ($100 billion).
Your firm has served as the auditors for AP for several years. AP's Board of Directors has requested that your firm prepare a report for the Board discussing how its decision should be reflected in AP's financial statements under U.S. GAAP. Your supervisor, Charles Brogan, has asked you to research the technical issues involved and prepare a memo for him recommending how the issues should be handled; he will subsequently prepare the report for AP. He has told you not to be concerned with the issue of foreign currency translation, as that is well understood by AP. Prepare the memo for Mr. Brogan. Chapter 10 discusses memos.