Question

The Company believes that there are no compliance issues associated with applicable environmental laws and regulations

that would have a material adverse effect on the Company. The Company is also remediating environmental contamination

resulting from past industrial activity at certain of its sites. Expenditures for remediation and environmental liabilities were $11 million

in 2016, and are estimated at $44 million in the aggregate for the years 2017 through 2021. These amounts do not consider potential

recoveries from other parties. The Company has taken an active role in identifying and accruing for these costs and in management’s opinion,

the liabilities for all environmental matters that are probable and reasonably estimable have been accrued and totaled $83 million and $109

million at December 31, 2016 and 2015, respectively. These liabilities are undiscounted, do not consider potential recoveries from

other parties and will be paid out over the periods of remediation for the applicable sites, which are expected to occur primarily over the next 15 years.

Although it is not possible to predict with certainty the outcome of these matters, or the ultimate costs of remediation, management does not

believe that any reasonably possible expenditures that may be incurred in excess of the liabilities accrued should exceed $64 million in the aggregate.

Management also does not believe that these expenditures should result in a material adverse effect on the Company’s financial position, results of

operations, liquidity, or capital resources for any year. a.How does Merck account for environmental liabilities that are probable and reasonably estimable? At December 31, 2016, how much were these liabilities? b.How does Merck account for environmental liabilities that are reasonably possible? At December 31, 2016, how much were these liabilities? c.The footnote mentions $83 million and $44 million as estimated future expenditures. Explain what each of these amounts represents and why they differ.

Answer 1

a. Merck will accrue the environment liabilities that are probable and can be reasonably estimated. At December 31, 2016 Merck has an amount of $83 million of these environment liabilities.

b. Merck will not accrue the environment liabilities that are reasonably possible. Merck will disclose about these liabilities in the footnotes. At December 31, 2016 Merck has an amount of $64 million of these environment liabilities.

c. The amount of $83 million will be the total accrual on Merck's balance sheet. The amount of $44 million is the amount that it expects to be paid out in coming five years. The difference of $39 million will be paid after the period of five years has ended.