Does GM have a contingent liability for its 2015 – 2019 Chevrolet Corvettes?

Recently, a class action lawsuit was filed against General Motors (GM) accuses GM of using inferior materials and a faulty manufacturing process that resulted in poor quality wheels on its 2015 – 2019 Chevrolet Corvette sport cars.

The 18 parties who filed the lawsuit state that wheels on their Corvettes have bent or cracked even though their cars have low mileage. Complaints have also been filed with the National Highway Traffic Safety Administration (NHTSA) and the Better Business Bureau (BBB.)

The lawsuit, filed Sept. 10 in U.S. District Court for the Eastern District of Michigan, alleges that the Corvettes’ wheels are “prone to deforming and cracking, without impact damage.” The lawsuit also alleges that the wheels were made with materials that is “cast, rather than forged, and is of insufficient strength, and in an insufficient quantity, to withstand the torque and power input from the drivetrain.” Car and Driver magazine’s review of the 2017 Corvette Grand Sport was also mentioned in the lawsuit filing. Car and Driver reported that it had to replace or repair six damaged wheels during the 40,000-mile test period that the car was used in its review.

GM has responded that there are no safety recalls on the vehicles and that the problems with the wheels are due to normal wear and tear. GM alleges that damage can occur from a car wheel hitting a pothole and or other road hazard even though there may not be visible damage to the tire itself.

Discussion questions

1. What are the three ways that a contingency liability can be treated in the financial statements?
2. What conditions would need to exist for GM to not report this lawsuit as a contingent liability?
3. How do you think GM will treat this lawsuit in its 2020 financial statements? Explain.