A governmental hospital has about 30 outstanding medical malpractice claims when it prepares its 2012 financial statements. It does not carry third-party insurance. The total amount claimed on these claims is $2,000,000. Historically, most of these claims are settled out-of-court for about 20 percent of the amount claimed. Some of claims were filed before 2012 and some were filed in 2012. It takes an average of three years to settle them. What is the appropriate method of handling this situation on the financial statements?
a. do not report anything either on the face or in the notes to the statements
b. do not report anything on the face of the statements; but in the notes, state that claims were received, insurance is not carried, and it takes about three years to settle claims; say nothing about the amount of the claims or the potential loss
c. develop a best estimate of the probable loss (about $400,000), based on past experience, and report a liability for that amount on the balance sheet
d. report a liability of $2,000,000 on the balance sheet; and state in the notes that the liability may be lower if the hospital is successful in defending itself
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