Question

Before the year-end, a company is assessed $200,000 in additional taxes as a result of an IRS audit. The company's tax attorney believes that a settlement with the IRS can be reached for $110,000. Settlement has not been reached before the financial statements are issued.

Should the company disclose this matter in the footnotes to the company's financial statements at year-end?

Please reference the appropriate accounting standards or other professional pronouncements  

Answer 1

Yes the company should include the same in financial statement as Contingent Liability. As per GAAP contingent liability can be divided into three broad catagories.

high probability

medium probability

low probability

as per the information provided this expense is high probability. High probability liability means whose chances of occurance in the near future is more than 50 % and whose value can also be estimated.

As per U.S. GAAP a contingent liability is a potential future loss that depends upon any triggering event to turn into actual expense.

in the given case amount can be estimated and there is high probability of occurance of the expense so it should be included in liabilities side in balance sheet and as an expense in income statement

The Accounting standard no. 5 of Financial Accounting statndard board (FASB) treats the contingent liability. It says that a firm must distinguish between losses that are probable, reasonably probable or remote.Only the contingent liabilities that are the most probable can be recognized as a liability on financial statements.

In the given case since the amount can be estimated it should be included in financial statements.