Say a company is being sued and they know they are in the wrong. The legal counsel says the penalty will be around 5 million. Would you be better off not reporting anything until it is settled or should you make an accrual for the estimated amount?
2007-11-14 13:16:45 · 1 answers · asked by Anonymous in Business & Finance ➔ Other - Business & Finance
This is a perennial toughie. Actually, if they're so sure they're in the wrong, they should settle out of court, but that's not your question. The trouble with making an accrual is that the other side will point to it as an admission of guilt and you've lost your case for sure. That's why you notice that hardly anyone makes an accrual for a case that's yet to reach the Courts. They'll take the easy way out by just making a disclosure in the notes to the financial statements to the effect that the co. is defending a lawsuit and that no provision has been made as the outcome is hard to estimate and the directors are of the opinion that the case has no merits.
2007-11-14 16:05:20 · answer #1 · answered by Sandy 7 · 0⤊ 0⤋