Denton County Annual Financial Report

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Denton County Annual Financial Report

Government for Non profit –ACC206

Professor Higgins

July 29, 2012

The disclosure of contingency liabilities has posed some concerns in business practices as it relates to the accuracy of financial reporting. With the recent market decline, many businesses have substantial cash flow issues and have closed without notice resulting in investor loss as well as loss of pensions for employees. This has caused an excessive amount of debt to be absorbed by banks and the government. In the details of the proposed amendment to FASB Statement No. 5 regarding disclosure of loss contingencies (2008), an entity shall disclose information about the risks associated with loss contingencies that will effect the entity’s potential financial position, cash flows and results of operation. According to the FASB concepts Statement No. 1(2008), which states, “financial reporting should provide information to help investors, creditors, and others access the amounts, timing, and uncertainty of prospective net cash inflows as it relates to the enterprise”. When financial statements fail to disclose any future liabilities in any current period, assets are overstated and therefore result in greater risk for investors. Any pending litigation against a company should be disclosed to protect the rights of employees, clients and investors from losses. Although contingent liability is a result of future events, it creates a misrepresentation of a business financial position. Businesses prefer not to disclose any litigation because they are seeking financial opportunities such as loans or investors and without contingency disclosure; there is a greater chance to obtain financial stability. While lawsuits can be lengthy, there are many risks of damaging businesses when a contingency loss is validated and the financial reports reflect understated liabilities from non-disclosure of this event. Company appearing in good financial position pose financial disposition for investors, government and employees are pressed to find involuntary new jobs such as the what happened in the last few years. Because contingency liabilities are based on future events with probable values of loss, SFAS No.5 was challenged because of the word “probable”. According to SFAS No 5 (1998), “probable” means “likely to occur” instead of “more likely than not.” This definition created objections by lawyers who insist that this is recording of a liability based on judgment and alienates the government’s ability to fairly defend the public interest (1998). The interesting part of this is that accounting is reliable data and is not based on judgment but can be estimated in any given period. The principles set for recognizing a contingent liability are as important as those for long-term liabilities. Since liabilities represent the amount of debt a business has incurred, it should be reported accurately as an offset to assets. When we think about business operations as expenses occur, liabilities absorb the resources to sustain the business. It is important for business to analyze the financial position of the company before obtaining any outstanding debt. A contingent liability can absorb the financial position and cause a business to liquidate. Consequently, banks, creditors, other investors and en employees lose out as a result of a valid contingency loss. The proposed Accounting Standards Update (2010) states that with regards to loss contingencies, “entity shall disclose qualitative and quantitative information to enable financial users to understand all of the following, the nature of the loss contingencies, their potential magnitude, and their potential timing (if known)”. The ASU also would require public entities to present a table reconciling the total aggregate amount of the contingencies recognized in the statement of financial position at