Question

1. What are we basing our estimates on, especially when we need to book liabilities for unsettled litigation and unasserted claims?
2. Will we be tempted to create ‘cookie jar’ reserves during good periods that we can draw from during a downturn?

Answer 1

Answer)

An estimate is an approximating the business transaction amount for which there is no specific basis of measurement. We will estimate unsettled litigation and unasserted claims and of course others on the basis of the management judgement of probability of occurance of an event, past experiences and if management is no sure of probability it may use expert opinion also.

Cookie jar reserves is used by mostly managers of publicly held companies as by using it they create reserves that can be served as profits at the times when there is falling in profits for just to leave an impression in Analysts that the business is showing consistent results so that the investors show interest to purchase the stock which keeps the companies stock in high. However, in general business which are no held publicly will not have that temptation in it as they won't have high rotation of their shares.