Question

Mills Corporation has a practice of discounting the notes receivable to the bank to increase its cash flow. Since the maker of the notes receivable has always paid the bank, Mills Corporation does not list the notes receivable as a contingent liability. Is this an ethical practice? What would be compromised if the liability did not appear in the notes of the annual report?

Answer 1

The discounting of the notes receivables is an item to be disclosed as contingent liabilities as a note under the balance sheet because the company is not sure whether the non-payment of the Note receivable which are discounted with bank would result into liability in the future. The contingent liabilities amount is not included in the Balance Sheet figures.

If the company is not declaring the discounted Notes under the contingent liabilities then it is not a good practice and ethically wrong practice.

If the liability did not appear in the notes of the annual report, the information of the shareholders and analyst are compromised and “prudence” concept of accounting is violated which says that we have to recognize each and every liability of the future. The notification to the management and shareholders of the would be liability in the future is skipped.