Accounting Disclosures: Financial Policies, Profits & Investors - Essay Sample

Introduction

Accounting disclosures are statements that establish financial policies of the business and report the expenses as well as the profits of a business in a given period (Complete Controller, 2018). The accounting policy statements are declared to investors in the company and also to potential investors and are strategies of accounting which are followed by the business. The primary purpose and principle of the policies are to disclose any event or occurrence which could or have impacted the financial statements of the business (Complete Controller, 2018). The general exhibition for accounting disclosures includes liabilities. Disclosure of accounting policy aids in preventing potential loss and future misuse of assets (Complete Controller, 2018). The following assignment will assess three independent accounting situations and analyze critical points examined in the given circumstances, evaluate proper accounting treatment for each situation as well as any required disclosures and finally justify the rationale for each solution provided.

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Some disclosures, such as financial statements, are guided by IFRS, which identifies potential exposures needed and includes minimum disclosures required (LumenCandela, n.d.).As such, disclosures avail additional information concerning the financial statements of a business (LumenCandela, n.d.). Disclosures can be required by voluntary management decisions or generally accepted accounting principles (LumenCandela, n.d.).

In the first scenario, Wesley Co. has been sued for $800000 by a worker who was injured in the factory. The accident is deemed to be partially as a result of the worker's negligence. Wesley's counsel believes that it is reasonably possible that the suit outcome is unfavorable and that the company would incur a cost of $250000 to $500000. In this scenario, it would be advisable that Wesley disclosure in their financial statements any possible liability that could accrue from the lawsuit as well as indicate the reasonable range. However, as stated in the FASB Accounting Standards Codification Manual, Section 450-25-2, (Ameen & Bruns, 2010), the stated amount is reasonably possible. However, the amount is not probable and thus should not be accrued in the financial period but should be disclosed.

In the second scenario, an author has sued Greer Co. for a breach of contract. The author is seeking $2400000 in damages, but the legal counsel for Greer predicts a probable unfavorable outcome. A range of $800000 - $1800000 is said to be a reasonable award for the plentiful. Based on key points in the scenario, the proper accounting treatment would be to make a disclosure if it is material (Riccardi, 2015). The financial statements should include the amount of the lawsuit, nature of liability, the possible range estimates, and the accrual reasons (Riccardi, 2015). In this case, the accrual is probable and should, therefore, be included in the financial statements of the current period. As indicated in the case scenario, no amount of the estimated range of the award is a better estimate than any other amount for the damages. As such, $800000 should be accrued in the current financial statement as it is the lowest estimate in the range.

In the third scenario, Quinn's lawyer is confident that it is probable that damages of $1000000 will be awarded to Quinn in his pending court case. The main point, in this case, is that a gain contingency is evident. It should, however, not be disclosed or accrued. The rationale behind the decision is that gain contingencies should not be accrued or disclosed unless the profitability of a business is very high, and the gain contingency is realized (Riccardi, 2015).

References

Ameen, E. C., & Bruns, S. M. (2010). Accounting standards codification and the clarity of financial disclosures. Journal of Business Administration Online, 9(2).

Complete Controller. (2018, September 10). Importance of Accounting Policies Disclosure and Their Impact on Business. Retrieved from https://www.completecontroller.com/importance-of-accounting-policies-disclosure-and-their-impact-on-business/

LumenCandela. (n.d.). Additional Notes on Disclosures | Boundless Accounting. Retrieved from https://courses.lumenlearning.com/boundless-accounting/chapter/additional-notes-on-disclosures/

Riccardi, L. (2015). Accounting Standards for Business Enterprises No. 36-Related Party Disclosures. China Accounting Standards, 277-281. doi:10.1007/978-981-10-0006-5_40