Accounting for Contingent Liabilities: What You Disclose Can Be Used Against You

20 Pages Posted: 22 Jun 2014

See all articles by Linda Allen

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: June 20, 2014

Abstract

Accounting standards require disclosure of estimable losses from contingent liabilities such as litigation expenses. However, revelation of the firm’s private estimates of the probability of loss and possible legal damages can be detrimental to the firm by encouraging litigation and increasing the costs of settlement. In this paper, I propose a model (the US-patented TMTM) that uses publicly-available data to provide accurate and unbiased estimates of litigation damages without requiring firms to publicly disclose their private assessments or litigation reserves. This provides valuable information to the users of financial statements without undermining the firm’s right to preserve sensitive internal information.

Keywords: contingent liabilities, litigation damages, accounting standards

JEL Classification: M41, K41, G30

Suggested Citation

Allen, Linda, Accounting for Contingent Liabilities: What You Disclose Can Be Used Against You (June 20, 2014). Available at SSRN: https://ssrn.com/abstract=2457177 or http://dx.doi.org/10.2139/ssrn.2457177

Linda Allen (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States
646-312-3463 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://stern.nyu.edu/~lallen

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