Recognition of liabilities

It has been argued that many companies’ profits are overstated because they fail to take into account the full cost of their operating activities. This is particularly relevant when considering the potential future environmental impact of both production and ultimate disposal of the items they manufacture. Consider the current approach to accounting for liabilities.

Required

A. What are the shortfalls of the current definition for liabilities when applied to potentially negative environmental situations?

B. How might this lead to profits being overstated?

C. Does it matter that accounting often fails to capture this information?

D. Should we change the definition of liability, and if so how?

E. What would be the broader ramifications for accounting and businesses if we were able to more accurately capture these liabilities?

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Recognition of liabilities

It has been argued that many companies’ profits are overstated because they fail to take into account the full cost of their operating activities. This is particularly relevant when considering the potential future environmental impact of both production and ultimate disposal of the items they manufacture. Consider the current approach to accounting for liabilities.

Required

A. What are the shortfalls of the current definition for liabilities when applied to potentially negative environmental situations?

B. How might this lead to profits being overstated?

C. Does it matter that accounting often fails to capture this information?

D. Should we change the definition of liability, and if so how?

E. What would be the broader ramifications for accounting and businesses if we were able to more accurately capture these liabilities?

Leave a Reply

Your email address will not be published. Required fields are marked *