To: Professor KomissarovSubject: Current Events #4Date: April 14th, 2011Contingencies: U.S. GAAP v. IFRSGenerally, the main idea of U.S. GAAP policies and IFRS policies are concurrent: if thereis any information prior to releasing financial statements to the public about liabilities that are probable, those liabilities must be disclosed to the public. This is the broad overview of what U.S. GAAP and IFRS have for reporting contingencies; however going beyond this generalized statement is where the contrast between the two organization’s guidelines appears. Under U.S. GAAP, any contingencies that do not appear as probable1 only require minimal disclosure, and no estimate on the possible future liability. However IFRS requires that any information disclosed in either the financial statements, or notes to the financial statements, includes an estimate of the anticipated future cost. Given this brief introduction to the two sectors of reporting contingencies, there are some questions to explore that provide further insight into which of the regulations are better suited for the integrity of financial reporting. Questions such as: 1.) Which organization follows a more rule based contingency reporting system 2.) Which system of reporting hides pertinent information for investors and public interest? and 3.) Which solution is internationally applicable and comparable? To answer these questions, let’s look at some more specific applications of contingency reporting under U.S. GAAP and IFRS.IFRS: Regulated by RulesIn many other sectors of financial reporting, IFRS has more refined guidelines when it comes to structuring and reporting financial information. When compared with U.S. GAAP for proper contingency reporting guidelines, the IFRS continues to have a more rule based process. Using IAS 37, IFRS splits contingencies into provisions2 and contingent liabilities to define set criteria for each level [ CITATION Ers09 \l 1033 ]. U.S. GAAP has set definitions, but apart from a probable contingency the guidelines that each contingency falls under is very broad. Looking at the Kiss Catering Inc. (KCI) case, broad definitions on how to disclose contingent information could hide pertinent company insights from investors.KCI: U.S. GAAP v. IFRSThe KCI case is a valid example to view the methods that each organization requires for contingency disclosure. In the 2010 reporting period, neither U.S. GAAP nor IFRS would have reported the catering mishap under provision guidelines (the most probable level that a liability will arise). It is important to note that the IFRS would have three important non-formal disclosures in the notes to the 2010 financial statement since the case would fall under the contingent liability guidelines. These three guidelines are: 1.) An estimate of its financial effect 2.) Information on any uncertain amounts or timing of outflows, and 3.) Possible reimbursement[ CITATION Ers09 \l 1033 ]. Under U.S. GAAP, it is only necessary that disclosure is made for a1 Probable = 70% and higher[ CITATION Ers09 \l 1033 ]2 More likely than not = 50% and higher [ CITATION Ers09 \l 1033 ]1reasonable possibility3 and no estimates on future liabilities are included in that disclosure unlessthe probability of a future liability is greater than 70% [ CITATION Ers09 \l 1033 ].KCI’s 2011 financial reporting period also brings a higher probability of future liability (85%), and this would mean that both U.S. GAAP and IFRS guidelines require full disclosure in the financial statements. At this point however, the IFRS reported contingency from 2010 would already have an estimate, detailed information on case probability, and an estimate on reimbursement from the previous categorization of a contingent liability. Under IFRS, the investors/shareholders for KCI would already have a fairly good idea onthe amount of future losses if the case generated a liability, and make preparations to compensatefor any expected future losses. Under U.S. GAAP reporting guidelines, the investors would knowof the case, but no estimate would be disclosed as to how much possible loss there would be if the case was lost by KCI. Looking at this from an international perspective, IFRS would better uphold the integrity, applicability, and accuracy of financial information between companies and investors worldwide.International PerspectiveInternational competition between companies is a crucial aspect that can determine the course of business for any corporation. When faced with contingencies, it is also crucial that management is aware of the potential liability right away so that it can properly manage earningsto compensate for the expected liability. Corporations that follow IFRS guidelines report such expected liabilities more often on the financial statements than corporations that follow U.S. GAAP guidelines.4 From the international perspective, this allows management and investors more time to adjust to expected liabilities from current contingencies, and thus can potentially make the company more competitive in the international market. Recommendation: IFRS GuidelinesWhen comparing IFRS to U.S. GAAP for reporting contingencies, IFRS has a more refined system. The problem with U.S. GAAP is that there is too much room for interpretation when it comes to disclosing information relating to future liabilities, and this could cause problems with managing earnings. IFRS has realistic probability rates, and does not underestimate potential liabilities by providing information on expected losses sooner than later. This not only gives management time to properly manage earnings to compensate if the loss were to occur, but it also gives investors proper notice of future losses. For these reasons, the IFRS guidelines on reporting contingencies are more refined in comparison to U.S. GAAP guidelines, uphold the integrity of financial reporting, and provide more accuracy in reporting information to the public. While also considering the international impact of using IFRS over U.S. GAAP, my recommendation would undoubtedly be to follow IFRS contingency reporting standards.3 U.S GAAP equivalent to IFRS contingent liability4 Based on the required probability percentage comparisons for estimated liabilities under IFRS vs. those under