Option #1: “Back to the Future” (Or How a Product, Sold Almost 60 Years Ago, Resulted in a Current Financial Statement Restatement)
You have two options to choose from for the final Portfolio Project, due in Module 8. This week submit your Portfolio Project topic to your instructor for preliminary approval.
Provide detailed reasons for your Portfolio Project choice.
ISSUES IN ACCOUNTING EDUCATION
Vol. 33, No. 2
May 2018
pp. 9–17
American Accounting Association
DOI: 10.2308/iace-51968
‘‘Back to the Future’’ (Or How a Product Last Sold Almost
60 Years Ago Resulted in a Current Financial Statement
Restatement)
Diana R. Franz
University of Toledo
ABSTRACT: Owens-Illinois (OI) restated its financial statements for the year 2015 due to a disagreement with the
Securities and Exchange Commission (SEC) regarding how the firm accounted for unasserted claims related to
asbestos litigation. Almost 60 years ago, OI sold approximately $40 million of a product that contained asbestos and
has subsequently accrued almost $5 billion of liability related to those sales. From 2003 through 2015, OI had been
estimating unasserted claims over a rolling three-year window, which the firm viewed as preferable because it
improved the reliability of the resulting estimate that was important given the volatility of asbestos litigation. The SEC
required that OI accrue unasserted claims for as far into the future as foreseeable. While the accounting change
increased the estimate of the total liability for asbestos litigation, when it was allocated to individual years, this
change materially increased OI’s earnings for the years 2013, 2014, and 2015. Another interesting aspect of the
change was that the SEC’s required accounting treatment resulted in OI returning to the manner in which it had
originally estimated asbestos liability (pre-2003).
Keywords: unasserted claims; contingent liabilities; estimation; financial statement restatements.
INTRODUCTION
T
he city of Toledo, Ohio is often called the ‘‘Glass City’’ because it is where much of the glass industry began. One of
the founding firms of that industry is Owens-Illinois (OI). The company was originally founded in 1903 as Owens
Bottle Machine Company based on Michael Owens’ invention of the first completely automated glass bottle-making
machine. His invention meant that standardized glass bottles could be manufactured for a variety of products including food,
beverages, and alcohol. In 1929, the company merged with Illinois Glass Company to become Owens-Illinois. Currently OI has
over $6 billion of annual sales and remains a world-wide leader in the manufacturing of glass containers. OI manufactures
approximately one out of every two glass containers in the world.
While OI currently focuses exclusively on glass manufacturing, that has not always been the case. Repercussions from a
product that OI last sold almost 60 years ago resulted in the firm’s restatement of its financial statements for the year-ended
December 31, 2015. That product was called Kaylo. OI sold approximately $40 million of Kaylo from 1948 to 1958 and has
accrued almost $5 billion of liability related to it (OI 2015a).
Kaylo was used as an insulating material for pipes and boilers. OI began manufacturing this product because the raw
materials used in it were similar to those used in the manufacture of glass, with the addition of asbestos (Expansion, Ecology
and Energy: O-I During the 1950s–1970s; see, https://www.utoledo.edu/library/canaday/exhibits/oi/OIExhibit/expansion.htm).
Asbestos is a mineral that can be separated into thin durable fibers that are extremely resistant to heat, fire, and chemicals. These
properties made asbestos an attractive material and it was used in almost 3,000 products in a wide range of industries such as
the commercial and residential construction, shipbuilding, and automotive industries (Asbestos Exposure and Cancer Risk; see,
http://www.cancer.gov/about-cancer/causes-prevention/risk/substances/asbestos/asbestos-fact-sheet). The U.S. Navy actually
required all of the Kaylo it purchased from OI to contain asbestos (Krik v. Crane Co. et al. 2014).
However, it is now known that exposure to asbestos is potentially harmful to health. It can cause malignant diseases such
as mesothelioma or cancer and non-malignant diseases such as asbestosis, which results in shortness of breath due to scarring in
I thank Valaria P. Vendrzyk (editor), Mark Kohlbeck (associate editor), two anonymous reviewers, and Professors Doina Chichernea (University of
Denver), Karen Green (University of Toledo), and Peter Poznanski (Cleveland State University) for their thoughtful and helpful input.
Editor’s note: Accepted by Valaria P. Vendrzyk.
Submitted: January 2017
Accepted: October 2017
Published Online: November 2017
9
Franz
10
the lungs. Beginning in the 1970s (which was more than a decade after OI sold the Kaylo line of business), the use of asbestos
was restricted by the Environmental Protection Agency (EPA) and the Consumer Product Safety Commission and,
subsequently, the use of asbestos was phased out by most companies. Asbestos has still not been completely banned in the U.S.
and there are still products sold that contain it (U.S. Federal Bans on Asbestos; see, https://www.epa.gov/asbestos/us-federalbans-asbestos#notbanned).
THE DISAGREEMENT BETWEEN THE SEC AND OI
The Securities and Exchange Commission (SEC) initially contacted OI in June 2015 about the firm’s 10-K for the year
2014 (SEC 2015). The SEC questioned OI about three issues. Two of the issues were quickly resolved. However, the SEC and
OI were unable to resolve their disagreement over the firm’s estimation of asbestos-related contingent liabilities. After almost a
year of dialogue, OI concluded in a letter dated April 29, 2016 that ‘‘its previous method for accruing probable losses for
asbestos claims not yet asserted was not consistent with ASC 450 because it treated each annual period separately for purposes
of estimating total future claims, estimated disposition costs and estimated related legal costs for its asbestos-related liability.’’
A few days later, OI filed an 8-K that summarized the disagreement and indicated that the firm would change its approach to
estimating the asbestos-related liability. OI stated in the 8-K that the new approach to estimating asbestos litigation would
increase the liability by $295 million and that the firm would restate its financial statements for the years 2015, 2014, and 2013.
The issue that led to OI’s restatement was how the firm estimated unasserted claims regarding asbestos litigation.
Unasserted claims are a type of contingency. In OI’s 10-K for 2014, the firm had disclosed (in note 13 regarding contingencies)
that ‘‘The Company believes that a reasonable estimation of the probable amount of the liability for claims not yet asserted
against the Company is not possible beyond a period of several years’’ (OI 2014). OI had made similar disclosures in previous
financial statements. Applicable professional guidance (ASC 450) uses a two-step process in which the first consideration is
whether a claim will be asserted. If the answer to that question is ‘‘yes,’’ then the claim is treated as asserted and evaluated as a
contingent loss. Thus, an unasserted claim that is likely to be made would be accrued if loss is evaluated as probable and the
dollar amount can be reasonably estimated. OI’s use of the several-year timeframe seemed to be based on the firm’s concerns
about making reasonable estimates of the number of lawsuits and the dollar amount of the settlements beyond a relatively short
timeframe.
The SEC, in its letter dated June 8, 2015, asked for clarification about the specific timeframe used given OI’s ‘‘extensive
claims experience.’’ In its response dated July 7, 2015, OI stated that the timeframe used to estimate unasserted claims was three
years. OI indicated that ‘‘the Company’s position is that it cannot reasonably estimate a liability for claims not yet asserted for
the period beyond the next three years because the amount of loss cannot be reasonably estimated.’’ OI also noted that
applicable professional guidance ‘‘is intended to prevent accrual in the financial statements of amounts so uncertain as to impair
the integrity of those statements.’’ Table 1 contains a summary of the number of cases related to asbestos litigation that OI has
dealt with over the last 11 years. As shown, OI does have extensive claims experience with tens of thousands of asbestos cases.
This information is also shown in Figure 1.
Ultimately, the SEC (letter dated October 9, 2015) disagreed with OI’s contention that unasserted asbestos claims could
not be reasonably estimated beyond three years. The SEC indicated that ‘‘[w]e understand that the precision of an estimate may
become less precise over longer time periods; however, we note that ASC 450 does not require estimation with certainty, since
an estimate is inherently an approximation that is uncertain. Based on your history with asbestos claims, it seems unlikely that
the low end of your range of probable losses for time periods beyond three years is zero.’’
WHY IS ESTIMATING LIABILITY REGARDING ASBESTOS LITIGATION SO DIFFICULT?
Estimates related to asserted litigation are difficult due to their subjective nature and making reliable estimates about
litigation that has not yet happened compounds that difficulty. Furthermore, predicting the outcome of litigation related to
asbestos is probably one of the most difficult areas.
There is a wide range of opinions on asbestos litigation. One view is fairly critical of the companies that exposed people to
asbestos. This statement by Inselbuch (2016) reflects that view:
asbestos disease is the longest-running public health epidemic in our history. Asbestos exposure kills thousands of
Americans every year and it will continue to do so for many decades to come. For more than eighty years,
corporations that produced and distributed asbestos-containing products—and their insurance companies—have
attempted to avoid responsibility for the deaths and injuries of millions of American workers caused by those
products. Since before 1930, these corporations have hidden the dangers of asbestos and lied about their knowledge of
those dangers, lobbied to make it harder for workers to sue for their injuries, and fought to weaken protective
legislation.
Issues in Accounting Education
Volume 33, Number 2, 2018
Issues in Accounting Education
Volume 33, Number 2, 2018
32,000
Pending at the end of the year
18,000
32,000
21,000
7,000
2006
14,000
18,000
13,000
9,000
2007
11,500
14,000
8,000
5,500
2008
6,900
11,500
10,700
6,100
2009
5,900
6,900
4,200
3,200
2010
4,640
5,900
4,500
3,240
2011
2,610
4,640
4,390
2,360
2012
2,620
2,610
1,700
1,710
2013
2,260
2,620
1,830
1,470
2014
2,080
2,260
1,460
1,280
2015
Asbestos-related payments disclosed in the SCF (dollars in millions)
$171.1 $162.5
$347.1
$210
$190
$179
$170
$165
$158
$148
$138
Cases disposed
12,000 21,000
13,000
8,000 10,700
4,200
4,500
4,390
1,700
1,830
1,460
Average cash payment per settled case (actual dollars)
$14,258 $7,738 $26,700 $26,250 $17,757 $42,619 $37,778 $37,585 $92,941 $80,874 $94,521
35,000
12,000
9,000
Pending at the beginning of the year
Disposed
Filed
2005
Year
Summary of 11 Years of Asbestos Litigation Experience for OI
TABLE 1
‘‘Back to the Future’’ (How a Product Last Sold Almost 60 Years Ago Resulted in a Financial Statement Restatement)
11
Franz
12
FIGURE 1
OI Asbestos Cases by Fiscal Period
While most would agree that people harmed by exposure to asbestos are entitled to compensation, the outcome of asbestos
litigation often does not seem to link harm with the companies that caused that harm. One outspoken critic of asbestos litigation
is Lester Brickman, who has called asbestos litigation ‘‘a massive civil justice system failure’’ (Brickman 2005) that will
eventually be considered similar to such ‘‘great American scandals as . . . WorldCom and Enron’’ (Brickman 2004). Brickman
(2014) reflects the lack of linkage between causality and asbestos litigation settlement in his statement:
By 2047, when this scourge will have mostly run its course, several hundred thousand deaths will have resulted from
asbestos exposures. The litigation spawned by these exposures has no counterpart in our history. Over 10,000
corporations have been named as defendants, leading to nearly 100 bankruptcies (and counting). The bankruptcies
have led to the creation of a dual system for compensating claims. Personal injury lawsuits continue to be brought
against a dwindling number of solvent defendants.
The views expressed in these two quotes illustrate a number of the issues that make estimating the outcome of asserted or
unasserted asbestos litigation difficult. One issue that is evident in both Inselbuch and Brickman’s statements is that asbestosrelated illness or death have been ongoing for several decades and are expected to continue for several more decades. One
reason for this is the latency period, which is the length of time between exposure to asbestos and illness. For asbestos, the
latency period is 20 to 40 years (Brickman 2014). The latency period affects both the employees who manufactured or worked
with products containing asbestos and others indirectly affected such as their family members. For example, in a lawsuit
decided in 2013 (Grigg et. al. v. Allied Packing & Supply Inc. et al. 2013), OI was sued by a woman who alleged that she was
exposed to asbestos by handling and washing her ex-husband’s clothes. They had divorced in 1965 and she contracted
mesothelioma in 2011, so the latency period for her illness was over 40 years. The jury award to her from OI was $27.3 million.
The view expressed in Inselbuch’s statements that corporations and insurance companies conspired to withhold
information is consistent with the findings from Borel v. Fibreboard (1973). This was a pivotal case that effectively opened the
door to asbestos litigation. The Borel case established that some companies (such as Johns-Manville but not OI) had
deliberately withheld information from employees about the health effects of asbestos exposure.
Prior to the Borel decision, employees had filed workers’ compensation claims for their illnesses related to asbestos. After
the Borel decision, those claims became product liability (Brickman 2004). Typically, with product liability litigation, the
plaintiff has to prove harm from a particular product. Because many of the employees who dealt with asbestos had come into
contact with numerous products containing asbestos and it is impossible to tell which product caused illness, the courts relaxed
the standards for proving that a specific product caused the employee’s illness (Brickman 2014). It is also impossible to tell
whether an illness such as lung cancer was caused by exposure to asbestos or something else such as smoking.
Issues in Accounting Education
Volume 33, Number 2, 2018
‘‘Back to the Future’’ (How a Product Last Sold Almost 60 Years Ago Resulted in a Financial Statement Restatement)
13
The result of the relaxed standards combined with the latency period of asbestos means that plaintiffs initiating litigation
are recalling which products they were exposed to decades after their actual exposure. As the previous quote by Brickman
mentions, approximately 100 firms have been bankrupted by asbestos litigation. Part of the bankruptcy proceedings for these
firms is to fund a trust that will be used to compensate future plaintiffs in asbestos litigation. However, what has happened is
that after a firm goes bankrupt, plaintiffs are much less likely to remember using one of that company’s products and more
likely to remember using products from a non-bankrupt company (Dixon and McGovern 2015). Why would this happen?
Brickman (2014) speculates that it is because continuing to make claims against the trusts of the bankrupt firms would have
reduced and delayed the payment received compared to what might be obtained from a non-bankrupt firm.
A recent case involving a company named Garlock helps to illustrate these issues. For about 30 years that ended in the
mid-1970s, Garlock produced gaskets that contained asbestos. Garlock was a relatively minor producer of asbestos-containing
products (Brickman 2014). However, as other firms with asbestos liability declared bankruptcy, Garlock found that it was
being sued more frequently (Brickman 2014) and that the average cost of settling a mesothelioma suit increased from about
$10,000 in 1999 to nearly $80,000 by 2010 (O’Brien 2016). In 2010, Garlock declared bankruptcy to resolve its current and
future (i.e., unasserted) asbestos claims. The firm had not filed for bankruptcy as of December 31, 2016 but it will involve
setting up a trust for the asbestos claims. At the hearing to determine how much Garlock should contribute to the trust, experts
for plaintiffs’ attorneys asked for $1.0 to $1.3 billion. The judge presiding over the bankruptcy agreed with Garlock’s expert
who estimated the firm’s liability at $125 million. That is quite a difference. The judge indicated that the analysis by the
plaintiff’s experts was erroneous because it was based on Garlock’s settlement history from 2005 to 2010 and, post-bankruptcy,
the average claim will be much less (Brickman 2014; In re Garlock Sealing Technologies 2014). To analyze Garlock’s
estimate, the judge ordered that 15 cases be reviewed. In all 15 it was determined that the plaintiffs had withheld evidence. For
example, when suing Garlock, plaintiffs would allege that Garlock’s gaskets were the only product containing asbestos to
which they had ever been exposed. After settling with Garlock, the same plaintiffs would sue other trusts, indicating that they
had been exposed to other products (Brickman 2014).
OI’S RESTATEMENT
Due to its resolution with the SEC, OI modified its approach for estimating unasserted claims and included projections for
all future years. OI calculated an additional $295 million of asbestos liability at December 31, 2015 and restated the firm’s
financial statements. While the restatement resulted in an overall increase in liabilities and expenses related to asbestos
litigation, when the changes were reflected in annual fiscal periods, net income for the most recent years of 2015, 2014, and
2013 increased by a total of $431 million. This was a significant increase for these years that more than tripled reported net
income. As reflected in the revised statement of stockholders’ equity, net income for the years before 2013 decreased by $726
million (OI 2015a).
OI provided extensive disclosures about the restatement. The first risk factor addressed in Item 1A was the asbestos-related
liability. The management discussion and analysis also addressed the restatement. Finally, note 12 about contingencies
addressed the restatement (OI 2015a).
With this change, the SEC is requiring that OI go back to its original treatment of the asbestos liability. OI first accrued for
its asbestos liability in 1993 when it accrued $975 million, which was estimated to be sufficient to cover all outstanding and
future asbestos claims. This estimate proved to be too low and OI accrued additional amounts in the years 1998 ($250 million),
2000 ($550 million), and 2003 ($450 million).
Beginning in 2003, OI moved away from its initial approach of estimating the total liability to an annual assessment of the
next few years. OI indicated that some of the reasons for this change in accounting treatment included (OI 2015a, 2015b):
the volatility of asbestos litigation;
the growing number of co-defendants that had declared bankruptcy, which is expected to increase OI’s future liability;
and
issues with product identification evidence.
Given what has happened with asbestos litigation, these factors seem prescient. However, the SEC’s decision means that it
is ‘‘back to the future’’ for OI’s treatment of asbestos litigation.
QUESTIONS
In preparing your answers for questions 1 to 4, you will need to refer to OI’s amended 10-K for 2015, which can be found
at: https://www.sec.gov/Archives/edgar/data/812074/000155837016005950/oi-20151231x10ka.htm/.
1. What journal entry would OI have made to record the additional $295 million of asbestos liability?
Issues in Accounting Education
Volume 33, Number 2, 2018
Franz
14
2. Briefly summarize the effect of the restatement on the following financial statements. What accounts were affected? By
how much? What other disclosures were impacted? Note 1 in the restated 2015 10-K describes the changes.
a. The income statement.
b. The balance sheet.
c. The statement of cash flows.
d. The statement of share owners’ equity.
3. Explain why OI’s treatment resulted in an increase to the earnings for 2015, 2014, and 2013.
4. Based on OI’s disclosures in the 10-K prior to restatement, was it clear that the firm was using a three-year period to
estimate asbestos litigation? Be sure to explain your response.
5. The discussion between the SEC and OI was extensive and interesting. Appendix A shows all of the correspondence
between the two and includes web links to the letters. The following questions are based on those letters and the
information in the case.
a. Briefly summarize OI’s justification of its treatment of the unasserted asbestos liability. What are the pros and cons
of OI’s original treatment of the asbestos liability?
b. Briefly summarize the SEC’s position regarding the treatment of the unasserted asbestos liability. What are the pros
and cons of the SEC’s approach?
c. Which approach do you find preferable and why? You can choose either OI or the SEC, but your analysis needs to
be based on something other than the fact that the SEC prevailed or OI did not.
6. How is OI’s experience with asbestos litigation similar to Garlock’s? How is it different?
7. Approaching this issue as a member of OI’s executive management group, describe how your approach to asbestos
litigation would be similar to OI’s, or describe how it would be different.
REFERENCES
Borel v. Fibreboard Paper Products Corporation. 1973. 493 F.2d 1076. 5th Cir.
Brickman, L. 2004. On the theory class’s theories of asbestos litigation: The disconnect between scholarship and reality. Pepperdine Law
Review 31 (33): 33–170.
Brickman, L. 2005. Ethical issues in asbestos litigation. Hofstra Law Review 833: 1–56.
Brickman, L. 2014. Fraud and abuse in mesothelioma litigation. Tulane Law Review 88 (107): 1070–1152.
Dixon, L., and G. McGovern. 2015. Bankruptcy’s Effect on Product Identification in Asbestos Personal Injury Cases. Santa Monica, CA:
RAND Corporation. Available at: http://www.rand.org/pubs/research_reports/RR907.html
Grigg et al. v. Allied Packing & Supply Inc. et al. 2013. Superior Court of the State of California.
In re: Garlock Sealing Technologies, LLC. 2014. No. 10-31607 Bankruptcy. W.D.N.C.
Inselbuch, E. 2016. The Need for Transparency in the Asbestos Trusts. Testimony to the Senate Judiciary Committee Hearing. Available
at: https://www.judiciary.senate.gov/imo/media/doc/02-03-16%20Inselbuch%20Testimony.pdf
Krik v. Crane Co. et al. 2014. United States District Court Northern District of Illinois Eastern Division.
O’Brien, J. 2016. Despite Garlock settlement, asbestos lawyers can’t shake racketeering claims yet. Forbes 6 (Jun). Available at: https://
www.forbes.com/sites/legalnewsline/2016/06/06/despite-garlock-settlement-asbestos-lawyers-cant-shake-racketeering-claims-yet/
#5343ed0c719b
Owens-Illinois, Inc. (OI). 2014. Form 10-K. Available at: https://www.sec.gov/Archives/edgar/data/812074/000104746915000716/
a2222968z10-k.htm
Owens-Illinois, Inc. (OI). 2015a. Form 10-K/A. Available at: https://www.sec.gov/Archives/edgar/data/812074/000155837016005950/
0001558370-16-005950-index.htm
Owens-Illinois, Inc. (OI). 2015b. Letter September 14. Available at: https://www.sec.gov/Archives/edgar/data/812074/
000110465915064924/filename1.htm
Securities and Exchange Commission (SEC). 2015. Letter dated June 8. Available at: https://www.sec.gov/Archives/edgar/data/812074/
000000000015030395/filename1.pdf
Issues in Accounting Education
Volume 33, Number 2, 2018
By
SEC
OI
SEC
OI
SEC
OI
SEC
OI
SEC
Date
June 8, 2015
July 7, 2015
August 14, 2015
September 14, 2015
October 9, 2015
December 21, 2015
April 15, 2016
April 29, 2016
May 27, 2016
Initial questions about:
results of operations,
equity method investments, and
contingencies.
Response to three issues raised.
Five of the seven pages relate to contingencies.
Additional clarification sought about contingencies.
Seven-page response describing the firm’s approach to
estimating contingencies.
Questions why estimates are not made beyond three years
from the date of the financial statements and why the
amounts recorded are in the 3rd and 4th quarters.
Indicates that the firm has estimated losses over a threeyear period because that is the timeframe during which
the firm can make a reasonable estimate.
Continues to question the use of three years as the period
for estimating asbestos losses.
Agrees to estimate losses from asbestos litigation beyond
the three-year timeframe.
States that the filing review has been completed.
Summary
Link
Issues in Accounting Education
Volume 33, Number 2, 2018
https://www.sec.gov/Archives/edgar/data/812074/000000000016078366/filename1.pdf
https://www.sec.gov/Archives/edgar/data/812074/000110465916115639/filename1.htm
https://www.sec.gov/Archives/edgar/data/812074/000000000016072495/filename1.pdf
https://www.sec.gov/Archives/edgar/data/812074/000110465915086008/filename1.htm
https://www.sec.gov/Archives/edgar/data/812074/000000000015049339/filename1.pdf
https://www.sec.gov/Archives/edgar/data/812074/000000000015041637/filename1.pdf
https://www.sec.gov/Archives/edgar/data/812074/000110465915064924/filename1.htm
https://www.sec.gov/Archives/edgar/data/812074/000110465915050105/filename1.htm
https://www.sec.gov/Archives/edgar/data/812074/000000000015030395/filename1.pdf
Correspondence Between the SEC and OI on Contingency
APPENDIX A
‘‘Back to the Future’’ (How a Product Last Sold Almost 60 Years Ago Resulted in a Financial Statement Restatement)
15
Franz
16
CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE
This case is based on the restatement of Owens-Illinois’ (OI) December 31, 2015 financial statements. The accounting issue
that resulted in the restatement was how the firm estimated its liability for unasserted asbestos litigation, which is a unique issue.
While the SEC’s required accounting treatment increased OI’s liability in total, when those estimates were allocated to individual
years, earnings in 2015, 2014, and 2013 actually increased. Another aspect of the case is that the SEC’s required accounting
change results in OI returning to the way it had originally estimated its asbestos liability. That aspect of the case is what led to the
title ‘‘Back to the Future.’’ The specific learning objectives and the question that relates to that objective are as follows:
Understand the accounting for restatements and related financial statement effect (questions 1, 2, and 3).
Critically analyze restatement disclosures (questions 3 and 4).
Summarize and evaluate positions taken by the regulator and registrant (question 5).
Develop, compare, and contrast approaches to respond to litigation (questions 6 and 7).
This case fits into the coverage of topics in either first or second semester undergraduate intermediate financial reporting
classes. The first intermediate class often covers unasserted claims and contingent liabilities. Students tend to struggle with
understanding how a company could possibly need to accrue for litigation that has not even been brought by a plaintiff. This
case provides a perfect example of a situation that results in an accrual for unasserted claims. The case also illustrates that the
dollar amounts that are so easy to provide in an intermediate accounting textbook can be difficult to estimate in practice. Most
second semester intermediate classes cover error corrections and restatements later in the semester, so this case fits nicely into
the coverage of that topic and provides a review of unasserted claims and contingencies that were previously covered. In some
second semester intermediate classes, the semester begins with liabilities including unasserted claims and contingent liabilities,
and ends with accounting restatements. For the students in intermediate accounting classes, question 7 about management’s
approach to litigation was not assigned. This question focuses on management’s approach to the ongoing litigation and was
intended for graduate students. However, some faculty might want to cover this in their undergraduate classes.
This case can also be used with a Master of Business Administration (M.B.A.) or Executive M.B.A. (E.M.B.A.) class. For
this audience, the previously mentioned learning objectives still apply, other than possibly the first learning objective about
demonstrating the appropriate accounting treatment for the restatement. This question was not assigned because, for this group,
the focus is on understanding financial statement impact but not on recording transactions. For programs with a different
graduate focus, this question might be appropriate. In addition, with graduate students, this case provides an opportunity to
focus on how OI’s management approached its ongoing litigation issues by using question 7.
With both audiences (undergraduate and graduate), one approach to implementation is to provide the case to the students
prior to its initial discussion in class. I provided the case to students approximately five days prior to when it was covered in
class. Then, after the students had an opportunity to read the case, I allocated class time to an initial discussion about the facts of
the case. While the firm’s disclosures are clear, the situation is unusual and it was helpful to discuss the case and to review the
issues. Most student questions centered on how a firm could be accruing amounts for something that has not yet happened. This
discussion varied between 15 and 30 minutes. For the final case analysis, students received additional class time and were
encouraged to work in groups. With the intermediate classes, coverage in class was allowed for a class period of up to 75
minutes. For this class, the case was one of several analysis cases that was used and comprised 2 percent of the total points
available. Our E.M.B.A. program is a hybrid program with some face-to-face class sessions and quite a bit of online coverage.
This case was used during one of those online sessions, which may be why these students took more time on the case. In the
E.M.B.A. class, this case was one of five cases that were used and comprised 4 percent of the total points available.
One caveat that was addressed when the case was first discussed was that the illnesses caused to individuals by exposure to
asbestos are debilitating and potentially lethal. Neither the case nor our classroom discussion minimized the pain and suffering of
individuals with asbestos-related illnesses. The focus of the case is on accounting issues related to accruing liability for unasserted
claims regarding litigation. It helps that OI sold the product with asbestos long before the magnitude of the health hazards of it
were known.
This case has been used at two universities. At the first university, the case was used with both an undergraduate second
semester of intermediate financial accounting and an E.M.B.A. accounting class. At the second university, the case was used in
two sections of an intermediate one class. Both universities are mid-sized with total enrollments of approximately 20,000 students
and 2,500 to 3,000 students majoring in business. The student population at both universities includes diverse student groups and
would include traditional full-time students and non-traditional students who are often taking classes on a part-time basis.
Table 2 presents student feedback. Questions 1 through 10 were evaluated using a five-point Likert scale (5 ¼ strongly
agree, 4 ¼ agree, 3 ¼ neutral, 2 ¼ disagree, and 1 ¼ strongly disagree).
The average response of the feedback from students on questions 1 through 10 exceeds 4.0 on all questions except for two
questions in one of the first semester intermediate classes. The average response from the E.M.B.A. students was slightly higher
than the undergraduate students on many of the questions.
Issues in Accounting Education
Volume 33, Number 2, 2018
‘‘Back to the Future’’ (How a Product Last Sold Almost 60 Years Ago Resulted in a Financial Statement Restatement)
17
TABLE 2
Student Validation
Average Scores
from University One
E.M.B.A.
(Graduate
Non-Accounting
Majors)
1. The case improved my understanding of
unasserted claims.
2. The case improved my understanding of
contingent liabilities.
3. The case improved my understanding of
restating financial statements.
4. The case improved my understanding of
how estimates affect the financial
statements.
5. The case was interesting.
6. The case and related questions were
relevant to our course.
7. The case improved my understanding of
current issues facing accounting.
8. The case challenged me to think
critically.
9. I enjoyed completing a case based on an
actual company situation.
10. Overall, the case provided a valuable
learning experience.
11. Approximately how many hours in total
did you spend working on the case
(including individual work and
teamwork)?
12. On a scale of 1 to 10 (1 ¼ very easy, 10
¼ very difficult), overall how would you
evaluate the difficulty of the case?
Number of students responding
Average Scores
from University Two
Overall
Average
Intermediate I
(Graduate and
Intermediate I
Intermediate II
(Under-Graduate (Under-Graduate Under-Graduate
Accounting
Accounting
Accounting
Majors)
Majors)
Majors)
4.5
4.1
4.1
4.4
4.3
4.5
4.3
4.1
4.5
4.3
4.4
4.2
3.8
4.4
4.2
4.7
4.1
4.1
4.5
4.3
4.5
4.6
4.3
4.5
3.9
4.2
4.2
4.6
4.2
4.5
4.3
4.3
4.2
4.5
4.3
4.9
4.8
4.7
4.9
4.8
4.7
4.1
4.2
4.5
4.4
4.6
4.4
4.3
4.6
4.5
8.0
1.6
5.2
6.4
4.3
7.7
7.6
7.3
7.5
7.5
20
25
33
25
25.8
The response to question 11 indicates the amount of time that the students reported spending on the case. For the E.M.B.A.
class, the average amount of time reported was increased by one group that reported a large number of hours. The median for the
E.M.B.A. class was only 4 hours. Across all of the four classes that piloted the case, the average amount of time reported as spent
on the case was 4.3 hours. The time reported by the students in the second intermediate class is fairly low. The students in that
particular class were exceptional, although the expectation was that it should have taken them more time to complete the case.
TEACHING NOTES AND STUDENT VERSION OF THE CASE
Teaching Notes and the Student Version of the Case are available only to non-student-member subscribers to Issues in
Accounting Education through the American Accounting Association’s electronic publications system at http://www.aaapubs.
org/. Non-student-member subscribers should use their usernames and passwords for entry into the system where the Teaching
Notes can be reviewed and printed. The ‘‘Student Version of the Case’’ is available as a supplemental file that is posted with the
Teaching Notes. Please do not make the Teaching Notes available to students or post them on websites.
If you are a non-student-member of AAA with a subscription to Issues in Accounting Education and have any trouble
accessing this material, please contact the AAA headquarters office at info@aaahq.org or (941) 921-7747.
Issues in Accounting Education
Volume 33, Number 2, 2018
Copyright of Issues in Accounting Education is the property of American Accounting
Association and its content may not be copied or emailed to multiple sites or posted to a
listserv without the copyright holder’s express written permission. However, users may print,
download, or email articles for individual use.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
