Sell-Soft Company: Disclose Contingent Liabilities? Sell-Soft Company: Disclose Contingent Liabilities? Dana Ferretti ACC 206 Ms. Paula Beiser Chapter 10 Apply Your Knowledge: Case 2 November 7, 2010 Sell-Soft Company: Disclose Contingent Liabilities? There are several lawsuits against Sell-Soft Company. The lawsuits claim that they participated in unfair trading. A strong incentive is making the decision to disclose these contingent liabilities a hard one for Soft-Sell Company.
Why would a company prefer not to disclose, how could a bank be harmed if not disclosed, and what is the ethical tightrope companies walk when reporting contingent liabilities? Contingent liabilities are a possible obligation to the company arising from a past adventure. The liability will be confirmed or unconfirmed in one or more future events. (Putra, 2009)They would prefer not to disclose this contingent liability because it could affect their financial statements in a negative way. In order to report this liability, they would have to estimate a value of the liability.
Reporting the disclosure of a contingent liability could make investors pass over their company. It could halt any financial loans that they are trying to get. There are endless opportunities that Sell-Soft could loss out of it they report these contingent liabilities. A bank could be harmed if it is found that a company, like Sell-Soft, does not disclose a contingent liability to the bank when seeking a loan. If Sell-Soft is found guilty, their financial statements will probably suffer a great lose.
Banks depend on the financial statements to figure out what value to grant the loan for and also the interest rate to be given. The bank now may lose financial gain and also the monies owed to them for the loan. Also, the bank may lose their credibility to future companies seeking loans. Companies walk an ethical tightrope when it comes to reporting contingent liabilities. They want their financial statements to be as positive as they can be, but they must follow the GAAP guidelines. A company likes Sell-Soft needs to decide whether the contingent liability is probable or possible.
If it is probable, they should morally and legally disclose it. If the liability is only possible, they can conscientiously not report it, and will still be following GAAP guidelines. References Putra. (2009, April 14). Contingent Liabilities and Assets. Retrieved November 7, 2010, from http://accounting-financial-tax. com/2009/04/contingent-liabilities-and-assets-ias-37/. Horngren, Charles T. , Harrison, Walter T. , & Oliver, M. Suzanne. (2009). Accounting Chapters 9 – 14 with supplemental material. Upper Saddle River, NJ: Prentice Hall.