Question

what is commitment? How do auditors find them? How are commitments reported?

Answer 1

what is a commitment?

Commitments are the obligation to the outside parties of the company arising from any legal contract concluded by the company with those outside parties. These commitments shall be reported by the Company along with the existence, number and any special terms and conditions in the 10-K annual reports or SEC filings.

Example: Company signed an agreement to purchase 100 cars in the next 3 years. But as no delivery of cars occurred on the balance sheet date, no liability occurs. Still, this arrangement needs to be reported to balance sheet readers.

How do auditors find them?

Management will disclose all commitments to its auditors in a ideal world. It doesn't always happen so after an initial investigation auditors will conduct extended search procedures. Auditors may review reports from any company's Internal Revenue Service for unspecified commitments. Searching the board of directors meeting minutes is also beneficial.

How are commitments reported?

Commitments receive special treatment. While there will be a possible future payment, commitments will not appear as a liability on the balance sheet.

Commitments are then reported in the footnotes of Balancesheet.