Sell-Soft is the defendant in numerous lawsuits claiming unfair trade practices. Sell- Soft has strong incentives not to disclose these contingent liabilities. However, GAAP requires that companies report their contingent liabilities.RequirementsWhy would a company prefer not to disclose its contingent liabilities?Describe how a bank could be harmed if a company seeking a loan did not disclose its contingent liabilities.What ethical tightrope must companies walk when they report contingent liabilities?

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Sell-Soft is the defendant in numerous lawsuits claiming unfair trade practices. Sell- Soft has strong incentives not to disclose these contingent liabilities. However, GAAP requires that companies report their contingent liabilities.

Requirements

Why would a company prefer not to disclose its contingent liabilities?
Describe how a bank could be harmed if a company seeking a loan did not disclose its contingent liabilities.
What ethical tightrope must companies walk when they report contingent liabilities?

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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