Several years ago in its annual report, Philip Morris Companies, a major manufacturer of tobacco and food products, included footnote 16, which was almost five pages long. It consisted of a number of separate sections covering such topics as an overview of tobacco-related litigation, the type and number of cases, pending and upcoming trials, verdicts in individual cases, litigation settlements, smoking and health litigation, health care and cost-recovery litigation, and certain other tobacco-related litigation. During the year, over 500 smoking and health-related cases had been filed against the company, an increase of 30 percent over the previous year and 200 percent over the year before that. The company booked a pretax charge of over $3 billion, reducing reported net income to slightly over $5 billion.

REQUIRED:

Discuss Philip Morris's disclosure and accrual in terms of

(1) the methods used to account for loss contingencies, and

(2) the potential economic consequences associated with the disclosure and accounting treatment.