Question

Imagine that nimona company is facing ligitimization in their lowers in form them that there is a 80% chance that the company will not have to pay damages and a 20% possibility of damages arising how should the management recognize such a liability?

Answer 1

In cases where there is a probability of financial loss, even as low as 20%, the Nimona Company should consider disclosing the contingency in their financial statement notes, although an actual liability would only be recorded if the loss is probable and can be reasonably estimated.

Step-by-step explanation:

The management of Nimona Company, in assessing the potential liability for damages, must consider the probability and potential impact of the risk involved. As per the provided scenarios, there is an 80% chance that the company will not have to pay damages and a 20% possibility of damages arising. When faced with such a situation, management should use accounting principles to determine whether the potential liability is probable and can be reasonably estimated. If a loss is not probable, or the amount cannot be reasonably estimated, then it typically does not need to be recognized on the balance sheet as a liability. However, given the potential for substantial financial impact, even with a 20% probability, it may be prudent to at least disclose the contingency in the notes to the financial statements. This approach aligns with a conservative financial practice, analogous to buying insurance to cover low-probability but high-impact events.