Contingent Loss Due to Law Suit. Paper Sample

In the contemporary world, Companies frequently face situations, which make them accountable for impending monetary payouts. This occurs when vendors or customers sue the company. The outcome of court proceedings leads the company to lose contingency, a potential liability that is dependent upon future occurring and non-occurring events. In some circumstances, the lawsuit can have no merit and thus be easily defended. The company, however, is required to record the amount of liability estimated in the balance sheet of the financial reports only if the loss contingency is probable. The paper will analyze and demonstrate the loss accrued, the financial reporting implications of the insurance coverage, and disclosures made in the company's financial statements.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

Financial Accounting Standards Board (FASB). (2010), denotes that a loss can be accrued if the financial statements presented before the court shows that there had been an impairment or a liability was incurred at the time of recording entries in the financial statement. The report from the financial statements has to indicate all liabilities from the recent accounting period. It is clear in this condition that the company will most likely incur a loss in most of its future events or activities. At the same time, the amount of the loss accrued can be practically appraised to be from $15 to $20, which is determined using the losses incurred at the current accounting period (Financial Accounting Standards Board (FASB)., 2010). However, the disclosure of the loss is probable to the liability accrued at the date of entry of the financial statement.

Some proponents argue that insurance coverage may be subject to financial reporting implications. The company may lose its entity even when it believes that it is fully covered by the insurer. The insurer can be subject to lawsuit hence the court not considering the possibility of recovery from the insurance. Conversely, when the entity changes from occurrence-based to claims made, there is a likelihood of financial reporting implications. These changes will automatically reduce the insurance coverage, something that can be deemed as a significant loss by the company. Financial Accounting Standards Board (FASB) (2010), highlights that insurance coverage can be subject to reporting financial implications if there are disputes, which mislead users about the recovery in the reporting entries.

According to Advanced Audit and Assurance, auditors are needed to give an opinion on the financial statements as a whole. It comprises the notes to the financial statements that are significant parts of the accounts offering extra information on balances and transactions including other relevant information (disclosures). There are two categories of disclosures that should be made in financial statements; numerical disclosures, and qualitative disclosures (Advanced Audit and Assurance n.d).

Examples of quantitative disclosures include; disaggregation and examination of balances and transactions such as intangible assets, provisions for lease obligations. Segmental examination of revenue, profit and abridged financial data in connection to acquaintances and joint ventures (Advanced Audit and Assurance n.d). Qualitative disclosures include; explanation of damage losses recognized in a fiscal year, and validation that the going concern postulation is suitable (Advanced Audit and Assurance n.d). The main purpose of disclosure of accounting policies is to reveal any event that had an effect on the financial statements.

In an organization, auditors are mandated to detect and regard mistakes and fraud disclosures in the financial statement. Fraud disclosures in financial statements purpose to provide enhanced financial situation and could be included in two ways- qualitative and numerical faulty statements. According to Kostova (2012) auditors can use fraud disclosures to enhance the financial situation of an organization through the following ways; diminution of costs and liabilities, asset fraud and misuse, and unsuitable disclosures. Other fraud disclosures that can be incorporated in a financial statement when conducting an audit of an entity include; provision for returned goods, and customer claims (Kostova, 2012).

The disclosure of tax-related data on financial statements has grown over the last few decades. From the enactment of FIN 48 (ASC 740) in 2007, which requires all public companies to incorporate financial statement disclosures of accumulated reserves for indefinite tax positions, to recent demands for entities to visibly reveal tax returns, and report data on a nation by country basis (Kubick et al., 2014). There are outlays to revealing tax-related data in the financial statements. Augmenting the quality of disclosure on tax data can increase recognition of risk thereby augmenting the projected costs of tax-avoidance (Kubick et al., 2014). Tax authorities can use enhanced financial statement disclosures to target firms for audit and facilitate tax planning strategies for analysis during the audit process. Augmenting disclosure quality ultimately discloses sensitive tax data thereby augmenting the projected cost of tax evasion by augmenting detection risk (Kubick et al., 2014).

The following Financial statement shows the accounts that have been affected by disclosure for Value IFRC PLC the two financial years 2016 and 2017 (Value IFRS PLC, 2018).

• Balance Sheet (Extract) 2016 2017
• Non-current assets Deferred tax assets 3,650 3,000
• Other loans and receivables 6,200 6,200
• Available for sale financial assets 8,200 7,000
• Current Assets Other current assets - 504
• Trade (and other receivables) 7,900 5,100
• Contract assets - 1,900
• Other receivable - 790
• Financial assets at FVPL 10,400 10,400
• Derivative financial instruments 160 160
• Cash and cash equivalents 25,000 27,000
• Total assets 61,510 62,054
• Non-current liabilities Deferred tax liabilities 4,508 4,530
• Current liabilities Trade and other payables 12,800 13,200
• Contract liabilities - 655
• Derivative financial instruments 445 445
• Provisions 930 700
• Deferred revenue 490 -
• Total liabilities 19,173 19,600

In conclusion, contingent loss occurs in companies based on the outcomes of future events. Loss contingencies are reported on the footnotes on financial statements or journals only if their quantity can be estimated in court. The company, however, can protect its entities using insurance coverages but if there are disputes or claims from other parties, financial implications will be reported.

References

Advanced Audit and Assurance. Auditing Disclosures in Financial Statements. Retrieved from: https://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/auditing-disclosures.html

Financial Accounting Standards Board (FASB). (2010). Proposed Accounting Standards Update: Contingencies (Topic 450): Disclosure of Certain Loss Contingencies. Retrieved from: https://asc.fasb.org/imageRoot/73/6954873.pdf

Kostova, S. (2012). Audit procedures for disclosure of errors and fraud in financial statements of Bulgarian companies. Annals of the Alexandru Ioan Cuza University-Economics, 59(1), 49-66. Retrieved from: file:///C:/Users/User/Downloads/[20688717%20-%20Annals%20of%20the%20Alexandru%20Ioan%20Cuza%20University%20-%20Economics]%20Audit%20Procedures%20for%20Disclosure%20of%20Errors%20and%20Fraud%20in%20Financial%20Statements%20of%20Bulgarian%20Companies.pdf

Kubick, T. R., Lynch, D. P., Mayberry, M. A., & Omer, T. C. (2014). The effects of increased financial statement disclosure quality on tax avoidance: An examination of SEC comment letters. working paper. Retrieved from: https://www.mccombs.utexas.edu/~/media/Files/MSB/Departments/Accounting/Brownbag%20papers/LynchUTWorkshop952014.pdf

Value IFRS PLC. (2018). Illustrative IFRS Consolidated Financial Statements. Retrieved from: https://www.pwc.com/gx/en/audit-services/ifrs/publications/ifrs-9/pwc-illustrative-ifrs-consolidated-financial-statements-2018-year-end.pdf