Question

A large retailer was sued nearly 5,000 times in a recent year—about once every 2 hours every day of the year. It has been sued for everything imaginable—ranging from falls on icy parking lots to injuries sustained in shoppers’ stampedes to a murder with a rifle purchased at one of its stores. The company reported the following in the notes to its financial statements. The Company and its subsidiaries are involved from time to time in claims, proceedings, and litigation arising from the operation of its business. The Company does not believe that any such claim, proceeding, or litigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position or results of its operations.

Explain why the company does not have to record these contingencies.
Comment on any implications for analysis of the financial statements.

Answer 1

Explain why the company does not have to record these contingencies

Answer:

Contingent Liability is a liability that is considered as may occur depending upon uncertain future events. As per accounting practice, it must be recorded if contingency Liability is probable as well as liability amount can be estimated. But regarding cases mentioned they don't satisfy both the condition hence they cannot be recorded as contingency liability and for such cases it is practice to put it in footnote of financial statement.

Comment on any implications for analysis of the financial statements

Answer:

There is no implication on the analysis of financial statement.

Every operation has certain amount of contingency liability which is probable and can be estimated, hence they are recorded but if they don't fall under any two categories they are put in footnotes. Also, there are categories which are remote such as windshield glass breakage of company car, minor accident in premises, or cases given in question - injuries sustained in shopper's stampede, murder by rifle purchased in one of retail store, etc those are remote and cannot be recorded even in footnotes.

These liabilities are understood to be present in any business operation but such recording are done as per practice described in above para, hence there are no implication on analysis of financial statement.

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