Question

Mills Corporation has a practice of discounting its notes receivable to the bank to increase its cash flow. If the maker of the notes receivable has always paid the bank, is it ethical for the Mills Corporation to not list the notes receivable as a contingent liability? What, if anything, would be compromised if the liability did not appear in the notes of the annual report?

Answer 1

Discounting Notes receivable means , to get early cash flow in books ,The company sold notes receivables to financial institution at a discount .which means company discounting the notes agree to pay the financial institution if the maker dishonors the note it will become a real liability to safe guard the liability the contingent liability is disclosed in the notes of accounts of financial statements .

Under GAAP, a contingent liability is defined as any potential future loss that depends on a "triggering event" to turn into an actual expense.

As Contingent liabilities are not recognised, but are disclosed, unless the possibility of an outflow is remote., as it disclosed when probability of happening an event is more than 50%

In the case Mills Corporations has practice of discounting its notes receivables to banks to get early cash flows ,normally makers of notes receivables pays the notes but its does not justify that mills corporation will not shows notes receivables in contingent liability . As makers have always paid but its doesnot create the sureity of event will not happen as liability will arise on mills corporation if makes doesnot pay

so its mandatory to show all the contingent liabilities of company in notes attached with financial statements as per IAS 37 in this case

If company Doesnot show contingent liability it will be opposing IFRS rules of disclosing and preparing of financial statements and in future if liability arose then company will have to pay its dues to bank and will ot able to justify this sudden laibility to pay off bank and this will create company image in hand of shareholders down and it might have to face higher charges of taxes as this will created wrong disclosures of company incomes .