Question

You are chief financial officer of Camp Industries. Camp is the defendant in a $44 million class-action suit. The company’s legal counsel informally advises you that chances are remote that the company will emerge victorious in the lawsuit. Counsel feels the company will probably lose $30 million. You recall that a loss contingency should be accrued if a loss is probable and the amount can reasonably be estimated. A colleague points out that, in practice, accrual of a loss contingency for unsettled litigation is rare. After all, disclosure that management feels it is probable that the company will lose a specified dollar amount would be welcome ammunition for the opposing legal counsel. He suggests that a loss not be recorded until after the ultimate settlement has been reached. What do you think? Please answer the following questions:

What are the facts of this situation?

Who are the stakeholders?

What are the ethical questions and how to do they apply to the stakeholders?

Based on your personal and business values, what would you do?

Answer 1

Camp Industries is in a $44 Million class action suit. According to the legal counsel it is likely to lose $30 Million in the same. Ideally and according to IAS 37,  Provisions, Contingent Liabilities and Contingent Assets, when there is a chance that the company is about to lose a suit, it should record a contingent liability with the amount of estimated loss in its books of accounts.

A stakeholder is a party that has an interest in a company and can either affect or be affected by the business. The primary stakeholders in a typical corporation are its investors, employees, customers and suppliers. There may be additional stakeholders like government or trade associations.

If I as a Cheif Financial Officer of Camp Industries agree with my colleague and disclose the contingent liability, I'll be hiding a potential loss from the stakeholders of the company and also not follow the International Accounting Standards.

A contingent liability is a possible obligation depending on whether some uncertain future event occurs, or a present obligation but payment is not probable or the amount cannot be measured reliably. According to IAS 37 - An entity must recognise a provision if, and only if:

• a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event),
• payment is probable ('more likely than not'), and
• the amount can be estimated reliably

In this case the outcome of the case is likely to be against us and the amount can also be estimated, therefore we will record the suit as a contingent liabity of $30 Million in the books of Camp Industries.