Financial information on the balance sheet is important for internal and external users. The company needs to make sure that all financial information was given to investors and creditors. According to Barron’s (2006), contingent liabilities may not be recorded on the balance sheet, but it will be recorded on footnotes (as cited in Mergers & Acquisition, 2014). Because contingent liability depends on some future events, some company may not want to disclose contingent liabilities to keep a positive image on the company (Porter & Norton, 2015).
According to the Journal of accountancy (2003), There is an example of contingent liabilities issues that cause difficulty with buyers and sellers in negotiating a purchase price. Buyers need to consider the company from the correct information provided by sellers. If the obligations are not contingent as of the acquisition date, it may cause subsequently problems on tax results and negotiating a purchase price. For example, A company wants to buy B company’s assets for $2 million and assumes its $700,000 of business liabilities. A company believes that they will have $2,700,000 basis in the assets. However, if B Company has contingent liabilities depended on the outcome of pending lawsuit, A company cannot predict the exact amount to support their making purchase decisions (Maples, 2003).
The above example points out the importance of disclosing contingent liabilities. The company should estimate the actual amount of the liabilities and records on the footnotes so that investors and creditors can have valuation information to apply with their business decisions. However, there is another significant point to consider in making business decision. Time value of