Question

Identify the applicable accounting convention for the following business scenario and explain your choice

Charter Communications has recently found itself at the wrong end of multiple lawsuits for failure to provide necessary services according to their contractual obligations. Senior management does not want to disclose the potential liability of these lawsuits on its financial statements.

Answer 1

The accounting conventions that are applicable for this scenario include conservatism, full disclosure and going concern .

According to the conservatism principle of accounting, if an accountant gets a chance to select from the two possible alternatives for reporting an item, he can choose the alternative resulting into a lower net income. In spite of it, accountants are expected to be objective and unbiased.

According to the full disclosure principle, a company has to provide the necessary information so that people who are reading financial information can make informed decisions concerning the company. According to this principle, the senior management's decision regarding not to disclose the potential liability of the lawsuits on its financial statements is not supported. Management has to disclose all the potential liability.

According to the going concern principle, an entity will remain in business for the foreseeable future. Therefore, Charter Communications will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices due to multiple lawsuits for failure to provide necessary services according to their contractual obligations.