Subjective Exam 3 Intermediate Accounting

CASE 1

The case at hand deals with contingent liabilities and events occurring after the balance sheet date . We will discuss the appropriate accounting treatment by referring to accounting standards pertinent on the aforementioned factors

A contingent liability is a possible obligation that arises from past events and its existence will be verified through the incidence or non-incidence of future events . The damage resulting form the explosion of the highly flammable tank is leading to a possible liability , which can be substantiated though future activities . This case is highly in

line with the definition outlined above , therefore leading this case to fall under contingent liabilities

The relevant accounting standard states that a provision for a contingent liability should be considered when the following factors are met

The business entity has a present obligation resulting from a past event

There is a high probability that an outflow of economic resource will result in to settle such incidence and

A reliable financial estimate can be computed of the obligation due

As regards to this case , it is clear that the organization holds an obligation resulting from the damage occurring from the explosion of the storage tanks , which did not solely effect the firm but also the premises in the vicinity . In addition , even though no law suits have yet occurred there is a high probability that legal action will be taken against the company to cover the damages occurred . This stems from the doctrine of tort as stated in relevant laws . At least the latter element noted in the factors above , a reliable estimate could even be derived through the use of experts . An architect and a lawyer can be employed that can provide within reasonable assurance the maximum liability that the company may be sued for . Since all the factors noted in the previous paragraph are met , the organization is required to account a provision for such contingent liability . The standard also necessitates that during the passage of time the firm considers the effect that the time value of money holds on the provision noted provided it is significant to the financial statements

For this provision the company is also required to disclose the following elements in the notes of the financial statements

The carrying amount of the provision at the beginning and end of financial year considered

Notes on any additional provisions and /or increases in the present contingent liability taken into account during the period

Amounts realized and charged against the present provision during the financial year

Any unused amounts of the provision reversed in the books and

The rise during the financial year in the discounted amount stemming from the time value of money

An important factor that ought to be meticulously considered in this case is why the organization did not account for a contingent liability on grounds that no legal action has yet taken place . Even though the organization is not yet legally committed , there are still events and conditions present at the balance sheet...