A company is required to report a liability in its balance sheet when it expects to lose a law suit and the amount of the expected loss can be reasonably estimated. Conversely, a company is prohibited from reporting a receivable in its balance sheet when it expects to win a lawsuit even though it is probably and the amount of the expected gain can be reasonably estimated.

Required:

Does the expected loss meet the definition of a liability found in the conceptual framework? Explain.

Does the expected gain meet the definition of an asset found in the conceptual framework? Explain.

Why do you think accountants treat these seemingly similar situations differently? Explain.

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As per principle of conservatism anticipate no profits but anticipate every ... View the full answer