Question

Case 21-2c

Contingencies — Product Recall
Pharma-C Inc. (“Pharma-C”) develops and manufactures generic prescription drugs and
over-the-counter medications. While Pharma-C is headquartered in the United States, its
parent company is headquartered in Germany. During November 2020, Pharma-C
distributed 10,000 bottles of its grape-flavored children’s cough medicine to various
distributors and retailers.
On December 31, 2020, Pharma-C discovered that 2,000 of the bottles were distributed
with dosing cups that are missing the appropriate 5mL and 10mL graduations. Pharma-C is
concerned that the use of the incorrect dosing cups could result in dangerous overdoses to
children.
There are no laws or regulations requiring Pharma-C to recall the children’s cough
medicine because of the incorrect dosing cups. In addition, there have been no consumer
lawsuits brought against Pharma-C for the distributed bottles. Because of the potential risk
to children associated with the mislabeled dosing cups, Pharma-C decided to voluntarily
recall the children’s cough medicine. On January 2, 2021, Pharma-C announced the recall
of the affected bottles, which is estimated to cost Pharma-C $10,000.
Discussion:
In its financial statements for the year ended December 31, 2020, how should Pharma-C
account for the voluntary product recall under: (1) U.S. GAAP and (2) IFRS® in reporting
to its parent company in Germany?

Answer 1

Under both U.S. GAAP and IFRS, Pharma-C should account for the voluntary product recall as a liability.

Some differences between them are:

1. Under U.S. GAAP: The recall cost of $10,000 would be recognized as a liability on Pharma-C's balance sheet as of December 31, 2020 which is recorded under the principle of "probable and estimable," where it is probable that a liability has been incurred, and the amount can be reasonably estimated.

2. Under IFRS: it also requires the recognition of a liability for the estimated cost of the product recall. It may also require disclosure in the financial statements about the nature and amount of the provision, significant uncertainties, and changes in the provision during the reporting period.