The Use of Court Judgement for the Recognition of Contingent Liability

• Main Authors: kuo-mingLin, 林國明
• Other Authors: Jeng-Fang Chen
• Format: Others
• Language: zh-TW
• Published: 2013
• Online Access: http://ndltd.ncl.edu.tw/handle/03535498809506848529

碩士 === 國立成功大學 === 財務金融研究所在職專班 === 101 === This study provides an in-depth review of the differences in accounting for contingent liability between IFRS, US GAAP and Taiwan GAAP to clarify the recognition criteria for contingent liability. In general, IFRS, US GAAP and Taiwan GAAP require recognition of the best estimate of a probable loss. However, US GAAP defines “probable” as “likely”（greater than a 70% chance of occurring）but IFRS defines “probable” as “more likely than not”（more than a 50% chance of occurring）. This creates different recognition thresholds between IFRS and US GAAP. To gain insight into how practitioners define “probable”, I sent a questionnaire to judges, lawyers, and accountants, asking for information about their “probable” threshold with respect to the recognition of contingent liability. Consistent with the US GAAP, the questionnaire results show that most respondents define “probable” as “likely” and is generally interpreted at just over 70% likelihood. In addition, even if there is explicit probability threshold in IFRS and US GAAP for the recognition of contingent liability, uncertainty would still remain around the estimated probability of loss of lawsuit as auditors must rely on the estimation from the legal counsel. Because of the subjective nature of legal expert’s estimation about the probability of the loss, I suggest that companies can use court judgments to be the threshold for the recognition of contingent liability. This can improve the comparability of the financial statements.