Question

Imagine if you were the CFO of a company who is actively involved in drilling in a remote African town. The neighborhood has shown extreme displeasure at company’s actions and they are in the process of launching a lawsuit which could result in severe consequences for the company. Could you identify how those consequences affect the financial statements of the company? What will be your reporting method?

Explain your answer in 500 words (plagiarism will result in zero marks plus academic misconduct)

Answer 1

The above case comes under the issue of Provisions and contingent events. A company has to kept an estimated amount as a provision to recover the near by future loss which is more likely to be occurred. If the same occurrence of loss depends on the happening or non happening of any other future event then it is called as Contingent liability.

In case the occurance is an regular event in course of business operations, then for the amount of loss an estimation shall be made on past experiences and a percentage is calculated. Based on the estimated percentage a provision shall be computed every year.

Accounting treattreatment shall be Debit Expenses should reflect in income statement and credit provision for expenses shall be reflected in liabilities of Balance sheet.

But in the case of a contingent liability it its occurance is in nearby future and can be estimated in currency value, then ut shall be shown as Expenses as LAWSUITE EXPENSES debit and LAWSUIT EXPENSES PAYABLE credit side.

Lawsuite expenses shall reflect the income statement and Lawsuit expenses payable shall reflect the liability side of balance sheet.

In another case if the amount of law suite cannot be esimated by the company it shall be communicated to the shareholders of the company by disclosing the information in the Notes to accounts of the Balancesheet.

REPORTING METHOD AS CFO:-

So, as a CFO of the company either we have to reflect this lawsuite in the financial statement if the amount of loss can be estimated and it may occur in near by future.

In other case if it is not possible to estimate the fact of future possiblity of loss due to a lawsuite shall be disclosed in the Notes to accounts of the company Balancesheet.