Definition
The term pending litigation, claims, and assessments refers to a potential near-term liability due to possible, threatened, or pending assertions, lawsuits, or monetary charges. Pending litigation, claims, and assessments are classified as a contingent liability and appear on the balance sheet as a current liability if the debt obligation is reasonably expected to come due in a single operating cycle or one year.
Explanation
Current liabilities are defined as debts that must be paid within one year or one operating cycle, whichever is longer. In order to be classified as contingent, the debt obligation depends on one or more future events to confirm the amount owed. If the likelihood of the future event is probable, and the obligation can be reasonably estimated, the company should accrue the expense and place the current liability on their balance sheet.
Before recording a lawsuit, claim, or assessment as a current liability, a company needs to consider the following factors:
Timing: to report a loss and liability in the current accounting period, the cause for the litigation or claim must have occurred prior to the date of the company's financial statements.
Likelihood of Occurrence: this includes the probability of an unfavorable outcome for the company. Factors such as the advice of the company's litigation team or prior success or failure should also be considered.
Measurability: the company should be able to reasonably quantify the amount of loss, if any.
Since the outcome of pending litigation can rarely be predicted with any precision, companies typically refrain from disclosing an estimate of the potential loss. Such disclosures can also weaken the company's position. For this reason, disclosure is usually limited to notes appearing alongside the company's financial statements.
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorNovember 6th, 2024
The financial accounting term contingent liabilities refers to near-term debt obligations that cannot be precisely measured, or the actual existence of the liability is uncertain. Contingent liabilities are classified as a current liability if the debt obligation is reasonably expected to come due in a single operating cycle or one year.Moneyzine EditorNovember 6th, 2024
The term disclosing of loss contingencies refers to the reporting of potential liabilities that are both probable and can be estimated. A loss contingency is one that will be incurred by a company if a future event is triggered. Such contingencies are classified on the balance sheet as a current liability if they are both probable and can be reasonably estimated.Moneyzine EditorNovember 6th, 2024
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