Altria’s Contingent Liabilities

Altria Group is the parent of Philip Morris USA Inc. and John Middleton, Inc. , which produces and sell cigarettes and other tobacco products. Altria also owns Philip Morris Capital Corp, which maintains a portfolio of finance leases.

On March 30, 2007, Altria Group distributed all of its remaining interest in Kraft Foods Inc. to its stockholders. It also completed the spin-off of its subsidiary Philip Morris International Inc. As of Dec. 31, Altria declared $57,211,000,000 in total assets, and debts of $38,657,000,000. A mounts owed by Altria’s consumer products units total $33,054,000,000, with $17,782,000,000 constituting as current debts.

Accordign to its balance sheet, Altria’s liabilities include short-term borrowings; accrued liabilities for marketing, taxes, employment costs, and settlement charges; dividends payable, accrued pension and healthcare costs, and long-term debt. It is Altria’s obligation to report all liabilities in its balance sheet in accordance with the accounting principles generally accepted in the United States (U. S. GAAP). For example, if Philip Morris obtains a EUR1. 5 billion, 364-day term loan, expiring Dec. 2, 2008, from Bank of America, it is expected to list in its balance sheet that it has debts of EUR1.

5 billion on account of the term loan. If Bank of America asserts that an additional EUR500 million is due on the term loan due to Philip Morris’ violations of its covenant that Philip Morris should limit allowed debt expenditures, but Phillip Morris disputes the claim, Philip Morris need not include BofA’s claim in its balance sheet. BofA’s claim will still be subject to arbitration or litigation, and courts may rule in favour of Philip Morris. Hence, Altria does not disclose these types of events in its balance sheet.

Altria, however, has fiduciary duties to disclose to shareholders all potential liabilities that may become actual liabilities in the future. These include liabilities that are contingent, disputed or un-liquidated. For Atria’s case, some of these liabilities will likely include pending lawsuits filed against the company. Pending lawsuits are subject to trial, may be sent to appeal after a ruling is served, may result to settlement between parties, may end up being dismissed, or may end up with monetary judgment, either substantial sums or de minimis amounts, against the defendant.

Because of the varied possible outcomes, Atria maybe unable to provide reasonable estimates on the debts they may incur as a result of these lawsuits. Regardless, shareholders have to be aware of the potential losses they may incur as a result of these contingencies. Investors also have to be aware of potential risks the company is facing. Hence, contingencies and other potential liabilities are listed as footnotes to financial statements. In its Annual Report, Altria discussed contingencies to its financial statements.

It stated that legal proceedings are pending or threatened in various U. S. and foreign jurisdictions against Altria and its subsidiaries on account of tobacco-related issues. However, it admitted that its management is unable to estimate the possible loss that could arise from an unfavorable outcome of any of these cases. Accordingly, Altria has not provided any amounts in its financial statements for unfavorable outcomes of pending litigations.

For tobacco-related lawsuits that have been resolved through settlements, Altria included these items in its balance sheet because its liabilities on account of those disputes have already been determined. For example, Altria has stated settlement payments it owes on account of the Master Settlement Agreement reached by PM USA with 46 states and other governments for health care cost recovery and other claims.

References

“2007 Annual Report. ” Altria Group, Inc. http://www. altria. com/download/pdf/investors_AltriaGroupInc_2007_AnnualRpt. pdf

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