Question

Decision Case 11-2 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 1. Why would a company prefer not to disclose its contingent liabilities? 2. Describe how a bank could be harmed if a company seeking a loan did not disclose its contingent liabilities. 3. What ethical tightrope must companies walk when they report contingent liabilities?

Answer 1

Answer :-

1. Why would a company prefer not to disclose its contingent liabilities?

• Unexpected liabilities will be liabilities that might be brought about by a substance relying upon the result of a future occasion, for example, a court case.
• These liabilities are recorded in an organization's records and appeared to be determined sheet when both likely and sensibly respectable.
• A reference to the asset report depicts the nature and degree of the unexpected liabilities.
• The probability of misfortune is depicted as probable,reasonably possible,or remote.
• The capacity to assess a misfortune is portrayed as known , sensibly admirable, or not sensibly evaluated .
• An organization would lean toward not to uncover this data since it might advance negative generosity and notoriety for things like claims.

2. Describe how a bank could be harmed if a company seeking a loan did not disclose its contingent liabilities ?

• Banks are not hurt unmistakably, in light of the fact that the organization has no information of any sensible duty nor a reasonable sum because of banks.
• Banks are hurt obviously to loan assets to an organization for understanding liabilities and not uncovering pending judgment grants.

3. What ethical tightrope must companies walk when they report contingent liabilities?

• Banks would survey organization announcing and believably on reasonable introduction and friends morals bound to give an account of unforeseen liabilities in sufficient indulgences in story educating peruses of non-plausible liabilities with a sensible depiction of the occasion.