Accounting for Contingent Liabilities: What You Disclose Can Be Used Against You
20 Pages Posted: 22 Jun 2014
Date Written: June 20, 2014
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: Suggested Citation