CONTINGENT LIABILITIES

CONTINGENT LIABILITIES

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Company ( small ) receives a solicitor's letter threatening a claim for damages just prior to Year End. This liability is disputed. The claim is unspecified as far as any amount is concerned, but could be around 10K in a worst case scenario and would be material at that level. No provision for losses arising from this claim has been made in the Balance Sheet, but a provision has been made for Legal Costs in defending.

The Notes in the Accounts usually show the statement that there were no material Contingent Liabilities at the Balance Sheet date.

Is it a requirement to disclose a potential liability even if it is unquantified and disputed. If so, what is the minimum required to be disclosed.

I just feel it is unfair that a Company has to disclose a spurious claim which reflects badly on the business to anyone viewing the Accounts at a later date.

Many thanks.

JOHN R

Replies (4)

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By J.R.BOX
27th Sep 2007 17:22

Thanks Euan
Got you. Unless there's something to say, say nothing. I suppose the same applies to the Note saying there are no material Capital Commitments.

Thanks again.

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By Euan MacLennan
27th Sep 2007 14:45

Disclosure required in Notes
Your circumstances fit exactly the first definition in the FRSSE of a contingent liability - a possible obligation arising from past events whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the entity's control. The FRSSE requires you not to recognise it in the accounts, but to disclose in the Notes:

a) a brief description
b) where practicable, an estimate of the financial effect
c) (actually a CA 1985 Sch.8 requirement) the legal nature of the contingent liability.

Having disclosed that the liability might amount to about £10,000, your note could state that the directors, after taking legal advice, consider that the claim is unjustified and that nothing will be payable.

The only grounds for non-disclosure is where the possibility of the liability is remote - I think it would be difficult to claim that when you have received a solicitor's letter.

Incidentally, negative disclosure generally, but definitely in the case of contingent liabilities, is not required, so why state something that may turn out not to be true. You are just making a rod for your own back.

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By J.R.BOX
27th Sep 2007 15:12

Thanks Euan
I appreciate your taking the time to comment. I understand all that you have said except the last paragraph. Can you please elaborate for me.

Many thanks.

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By Euan MacLennan
27th Sep 2007 16:14

Negative disclosure
It was just your comment that the Notes usually show a statement that there were no material contingent liabilities. It is not necessary to include any such note.

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