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Taking into consideration the objectives of financial reporting (as set forth in the background paper), should a business’ balance sheet report as liabilities all obligations representing legal (statutory or contractual) obligations? Should a business’ balance sheet report as moral or social obligations not constituting legal obligations (assume these are subject to reasonable measurement)?
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Question & Answer: Taking into consideration the objectives of financial reporting (as set forth in the background paper), should a business' balance sheet…..
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| * | The financial reporting takes into account all financial things, meaning, things which can be estimated or determined in monetary terms. |
| There are a lot of legal obligations, which the business has to take care and comply while doing their business, but all of these obligations, cannot be determined in monetary terms, so those can be reported as liabilities in the financial reporting. | |
| These things are important, which can be highlighted in the annual reports, but cannot be reported as liabilities, as there are not no fixed monetary outgo on such things which can be reliably estimated. | |
| It is the legal obligation of the company to comply with the legal laws of the country, every company has to follow it, but these cant be estimated in monetary terms as how much money will be spend in complying with it, or costs of non complying, even the business can be suspended or closed for non-compliance, so it is very difficult to estimate the costs, and put it into the liabilities. | |
| For all those , which can be estimated in monetary terms ,and on which the outgo of funds are sure, then those should be reported in the financial statements, like a lawsuit lost by the company, and penalty imposed by the law of court, so these needs to be reported as liabilities. | |
| * | The business balance sheet should report moral or social obligations ,which are subject to reasonable measurement. |
| the business has to take care of a lot of things, while doing business, and there are so many legal obligations, as well as moral and social obligations in front of it. | |
| Normally, all the monetary transactions are reported in the financial statements but it there are certain , moral and social obligations are there , which can be estimated, it needs to be reported as liabilities, as it is an outgo of funds for the company. | |
| for example, if it is the social obligation of the company to give free education to say, 10 poor people in one year. The cost of the same can be estimated reliably, so it can be put as an liabilities in the balance sheet |
