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

Answer 1

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AS FOR GIVEN DATA.

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?

Contingent liability :-

1. It is a present obligation which requires the probable outflow of enterprises resources which reliable measurement cannot be made

2. Present obligation which requires remote possibility of outflow of enterprise resources

3. Possible obligation for outflow of enterprises resources

4. Contingent liabilities is a potential liability that may occur, depending on the outcome of an uncertain future event.

In the given case our company is involved in drillings in remote African company.

The drilling was making some trouble to neighborhood and they are in process of launching of lawsuit aganist company.

The organisation will get a severe consequences if the company fails in lawsuit.

Now this can be reported as contingent liability in the financial statements.

This case can be consider as contingent liabilities as per below discussion :-

1. The settlement to be done with the neighborhood is present obligation

2. Settlement requires probable outflow of the enterprise resources

3. Reliable estimate to be done on the amount of the settlement

This case can be reported as contingent liability and provide this information in Notes to accounts .

Take the opinion of the legal counsel of the company about the estimate of losses can be occur if we fail in lawsuit and also information about the chances of failure in lawsuit.

If the legal counsel give more favour about incurrence of losses then provide provision in profit and loss statement to the extent of the estimate .

If the legal counsel give favour about winning in lawsuit then provide information and possible loss in the notes to accounts. Do not include in profit and loss statement.

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