Remote or unlikely contingent liabilities aren't to be included in any financial statement. When both of these criteria are met, the expected impact of the loss contingency is recorded. To illustrate, assume that the lawsuit above was filed in Year One.
Under IFRS, discounting is generally required for provisions that are expected to be settled in the longer term, where the time value of money has a material effect. The unwinding of the discount is recognized in profit or loss as a finance cost when it occurs. Don't forget that there's more than one accounting system out there....