SEC Maintains Focus on Contingent Liabilities

IAS 37 Provisions, Contingent Liabilities and Contingent Assets outlines the accounting for provisions , together with contingent assets and contingent liabilities . Provisions are measured at the best estimate of the expenditure required to settle the present obligation, and reflects the present value of expenditures required to settle the obligation where the time value of money is material. Dc.description.abstractContingent liabilities create management problems for governments.

Otherwise, the https://www.bookstime.com/ should disclose the nature of the contingency and explain why the amount can’t be estimated. In general, there should be enough disclosure about a probable contingency so the disclosure’s reader can understand its magnitude. Remote losses typically don’t require disclosure in your financial statements. If a loss is reasonably possible, you would add a note about it to the company’s financial statements. The same approach applies when the loss is probable, but it remains impossible to estimate the magnitude with any degree of certainty. Recording a contingent liability is a noncash transaction, because it has no initial impact on cash flow. Instead, the creation of a contingent liability notifies stakeholders of a potential liability that could materialize in the future.

Contingent liabilities: To report or not to report?

The SEC found that the failure to make these entries enabled HSG to report EPS that met analysts’ estimates in each of the relevant periods. In some periods, if HSG had recorded the expense, it would have missed the EPS estimates by as little as a penny. As the SEC Order recites, HSG was a defendant in several class action lawsuits alleging claims under various wage-and-hour labor laws. On two different occasions, HSG entered into proposed settlement agreements relating to certain of these lawsuits. In several reporting periods, HSG did not accrue any loss contingency despite entry into settlement agreements, submission of those agreements for court approval, and grants of preliminary approval by the court. That said, there can be a variety of techniques to use to help evaluate contingent liabilities and weigh their risk.

This is consistent with the need to fully disclose contingent liabilities items with a likelihood of impacting a company’s finances in the future. Other examples of contingent liabilities are 1) warranties triggered by product deficiencies, and 2) a pending government investigation. Conversion of a contingent liability to an expense depends on a specific triggering event.

What is a Contingent Liability?

The reason contingent liabilities are recorded is to meet IFRS and GAAP requirements and so the company’s financial statements are correct. If it appears that there is a possible outflow then no provision is recorded. A contingent liability is simply a disclosure note shown in the notes to the accounts. Instead, a description of the event should be given to the users with an estimate of the potential financial effect.