Question

  Most financial statement readers believe that property, plant and equipment, and intangible assets (most notably goodwill) are the most misstated assets on the balance sheet. Why?

Certain liabilities, such as contingencies, pose special challenges to the accountant. What guidance does GAAP provide to help answer these questions:

a.    Should we record the liability on the books?

b.    What is the amount of the liability that should be recorded?

c.     When should we record the liability, if ever?

Answer 1

a) Yes. As it presents the true picture of the entity's statement of accounts.

b) As per the GAAP Liability is a present obligation of the entity arising from the past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Therefore the amount of liability to be recognised will be the amount of outfow which is probable to be expected.

e.g. XYZ Inc. purchased goods worth $100,000 fro, ABC Inc. on 1 month credit. Now it is probable that an outflow of $100,00 will ytake place in 1 month perod, therefore XYZ Inc. should record the amount payable to ABC Inc. as liability.

c) Liability should be recognised onlhy when it is more probable taht an outfloe of economic resoureces wil happen.

e.g. A customer has filed for a suit demanding punitive damages against the company. The company's lawyers have suggested that it has more chances of winning the case and it will not have to pay any damages. Sinc in this case outflow of resources is not certain the liability will not be recognised.