Buzz Coffee Shops is famous for its large servings of hot coffee. After a famous case involvingMcDonald’s , the lawyer for Buzz warned management (during 2011) that it could be sued ifsomeone were to spill hot coffee and be burned. “With the temperature of your coffee, I can guarantee it’s just a matter of time before you’re sued for $1,000,000.” Buzz felt the likelihood wasremote. Unfortunately, in 2013, the lawyer’s prediction came true when a customer filed suit. Afterconsulting with his attorney, Buzz felt the loss was possible but not likely or probable. The casewent to trial in 2014, and the jury awarded the customer $400,000 in damages, which the company immediately appealed. Buzz felt a loss was probable but believed a lower amount could benegotiated. During 2015, the customer and the company settled their dispute for $150,000. Whatis the proper reporting of this liability each year from 2013 through 2015 under GAAP? Would thereporting differ under IFRS?

Question

Buzz Coffee Shops is famous for its large servings of hot coffee. After a famous case involving
McDonald’s , the lawyer for Buzz warned management (during 2011) that it could be sued if
someone were to spill hot coffee and be burned. “With the temperature of your coffee, I can guarantee it’s just a matter of time before you’re sued for $1,000,000.” Buzz felt the likelihood was
remote. Unfortunately, in 2013, the lawyer’s prediction came true when a customer filed suit. After
consulting with his attorney, Buzz felt the loss was possible but not likely or probable. The case
went to trial in 2014, and the jury awarded the customer $400,000 in damages, which the company immediately appealed. Buzz felt a loss was probable but believed a lower amount could be
negotiated. During 2015, the customer and the company settled their dispute for $150,000. What
is the proper reporting of this liability each year from 2013 through 2015 under GAAP? Would the
reporting differ under IFRS?

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