Question

Suppose a company has a facility located where disastrous weather conditions often occur. Should it report a probable loss from a future disaster as a liability on its balance sheet? Explain

Answer 1

Contingent liabilities are made for existing condition or situation involving varying degree of uncertainity that may result in increase/decrease of assets or incurrence/avoidance of liabilities. Contingent liabilities should be disclosed in footnotes to financilal statements and provision should be made if provision for loss is probable and amount of loss can be reasonably estimated.

In the current scenario the disatorous weather conditions are probable and if the company can reasonably estimathe the amount of loss from the contingency than it should make provision for such loss and also disclose the amount.