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General Accounting Discussions: Why do some companies choose not to disclose contingent liablity?

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    • CommentAuthorshOckwave
    • CommentTimeMar 19th 2007
     
    Assignment question...
    Found a couple of answer i.e. in a situation where the company thinks that the chances of the liability to come true is extremely remote or when the company chooses to "hide" the liability in attempt of avoiding market share backlash.

    Need verification as if it is right and if there are anymore views on this.
    • CommentAuthorCounter
    • CommentTimeMar 20th 2007
     
    If a contigent liability is remote it is not recorded as a liability and it is not disclosed in the notes to the financial statements.
    If the contingent liability is probable and you can estimate the amount, a liability and a loss are recorded.
    If the contingent liability is not probable (perhaps it is reasonably possible) or the amount cannot be estimated, the contingent liability and the contingent loss are disclosed.
    • CommentAuthorramesh
    • CommentTimeApr 24th 2007
     
    This is an interesting question. Disclosure of contingent liability if left to the discretion of the company, could be misused by the company, if the auditors are pliable. It would be better if there is a cap on the contingent liabilty exposure of the company vis-a-vis its tangible net worth. Say 2 or 3 times its tangible net worth. The company law provisions lay a cap on borrowings vis-a-vis its net owned funds, though no such prudential exposure norms are prescribed for non fund based liabilities such as bank guarantees issued at the request of the company (which could get funded if there is a default) or counter guarantees offered by the company to its lenders.

    What do accounting standards say on this. Can someone add to the discussion.

    Ramesh.

    ramesh_prathivadhi@yahoo.co.in

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