Question

Instructions?

On December 20, 2014, a former employee filed a legal action against Baylor for $100,000 for wrongful dismissal. Management believes the action to be frivolous and without merit. The likelihood of payment to the employee is remote.

question?

Is it a loss contingency? If it is, then we need torecognize how much as loss contingency and how much we have to disclose as loss contingency.

Answer 1

For recording a liability as “Current Liability”, there should be a probable outflow of estimated Cashflow and it should be reasonably estimated. Since in the given case management believes that action of the employee is without merit and the likelihood of payments to the employee is remote. So it is not recorded as Current Liability.

However the same needs to be disclosed under contingent liability in the Notes to accounts as a part of Financial Statements. Estimated cash outflow of $ 100,000 to be disclosed under contingencies.