Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 28

For the following questions, circle the best response.

Contingencies and commitments are disclosed as footnotes in the “financial review” section of the annual report rather than being directly included in the financial statements because

a. the obligation to make payments has not yet materialized.

b. litigation losses and purchase commitments do not have to be paid within a year.

c. reporting additional expenses and liabilities would have a negative effect on the income statement and balance sheet.

d. investors prefer to see the details in the financial review rather than in the financial statements.

e. these items relate only to specific segments of the firm’s operations.

Step 1 of 6

Contingencies and Commitments:

Contingencies refer to the possible outflow in future which don’t qualify as provisions. The probability of occurrence, obligation to pay and whether outflow of funds can be reliably estimated or not are the major factors which help to decide any figure to be presented in financial statements or in footnotes.

Commitments are agreements to be capitalized in future. These are disclosed as the outflow has not become due yet, as a consequence, it is neither a provision nor a liability.