Question

1. The commingling of legal and contingent liabilities exists under current GAAP accounting. Discuss potential problems this creates and propose alternatives to address them.

Answer 1

SW Firstly lets discuss contigent liability its a potential cost of company may or may not occur in future pissis - It is a guarantee on debt, a law suit a gout. Probe etc.. Here it brings money but the amount is unknown it can be zero or billions - contigent liability is recorded as follows in expenso or loss on income statement lliga liability on balance sheet to - it is often termed os loss contingency - investor should make their own contigent liabilities. a) There are many issues related to contigent liabilities. There is a history where the financial position of public sector is altered where the government has to bail out of financial entities. - The theoretical paper includes the rationale for taking them on, to safeguard against fiscal dists associated with the how to face challenges it also deals an of risk fron showo mitigation, disclosure contigent liability. ed with them

As per GAAR, categorized into contigent leability is three based on likelihood High probability there probable means future event is likely to occur. tile The record of contigent liability should be Proceeded when we know loss will occur and we can estimate the loss, and when Who can estimate its possible range and if no amount is better we have to record lowest. It has to be described in footnotes of financial statements. medium probability Disclose the contingent liability if it is possible reasonably but not probable; or if the liability is Probable but we cannot estimate amount. * Reasonable prossible refers to event occuri- o ng is more than remote but less than likely. low probability. Do not record of the p1cbout ity o4 occutanas Yemote > it as clear there contingent liability high. is no need to record unless risk of loss &

- The company's financial Statements have to review to see if any discloses of additional risks to be recognized . at can be considered as a warning, - There is no impact of contigent liability on cash flow. 2 When we record a liability it does not mean we are setting funds aside it actually must be paid.