Accounting for misunderstandings

Nelson Charsegun L. Aquino Assurance Partner, PwC Philippines 01 Jun 2017

Let me start by congratulating the newly minted Certified Public Accountants (CPA) who passed the CPA licensure examinations administered by the Professional Regulation Commission.

Not that I am a CPA myself, but I generally have high regard for CPAs because it takes a lot of hard work, patience and analytical thinking to become a licensed CPA in the Philippines. Accountants make great life partners, too, but I will not elaborate on the pros and cons of my assessment. Let me just emphasize that if you are the type of person who does not want to be held accountable for everything, do not marry an accountant. It is inherent in almost every accountant to pay particular attention to details and the accountant will never stop until everything is fully accounted for. Even misunderstandings are taken into account and may have serious financial implications.

Misunderstandings in the accounting world can arise from a number of events, most common of which are contractual or legal disputes. Take the case of the ongoing saga between media giant ABS-CBN and content provider Solar Entertainment over the alleged unsettled carriage fees of Sky Cable (a subsidiary of ABS-CBN). The dispute gained significant public attention when Solar pulled the plug on channels airing NBA games a few days before the NBA playoffs kicked off. Now that the NBA Finals between the Golden State Warriors and Cleveland Cavaliers is scheduled to tip off on June 2, 2017 (Friday morning, Manila time), a number of existing subscribers of Sky Cable are expected to once again raise their frustration via the social media. Both parties have reportedly tried to settle the dispute amicably but negotiations have failed, with Solar declining the settlement offered by ABS-CBN. It is now up to the courts to decide on the matter.

While Sky Cable subscribers worry about catching the live coverage of the NBA Finals, the accountant in me could not help but start thinking about the accounting implications arising from this legal dispute. It is not uncommon for companies to face lawsuits or other claims in the normal course of business. Hence, it is important for accountants, as well as various stakeholders, to understand how these disputes are reported or reflected in a company’s financial statements.

As with any other legal disputes, there can be a number of possible outcomes and exercise of professional judgment is necessary to determine how the potential effect of this legal dispute is reflected in the financial statements. Assessing the possible outcome will require management and their accountants to consult with their legal counsel and carefully evaluate the merits of the case.

A favorable assessment from the management and legal counsel of the company being sued will most likely result in a brief disclosure in the financial statements about the nature of the contingency. Or there will be no disclosure at all if they assess that the probability of the company being held liable is remote. On the other hand, an unfavorable assessment could result in recognition of significant losses considerably affecting a company’s bottom line and financial position when a company is forced to present a provision for probable losses arising from these disputes. The provision for probable losses is measured based on management’s current best estimate of the expenditure required to settle the obligation. The practical challenge in measuring a provision for probable losses is the high level of uncertainty involved in determining the final outcome of any lawsuit or the timing of the final decision. Accordingly, a company is required to review the carrying amount of the provision at the end of each reporting period and adjust the amount to reflect the current best estimate.
Judgment and the estimation technique used can be highly subjective and susceptible to management bias, and there is a huge disparity in how the potential effect of the same lawsuit can be presented in a company’s financial statements. Accordingly, stakeholders need to pay greater attention to management’s assessment of the potential effect of lawsuits or other claims, which may adversely affect their own interests. In areas where judgment calls are made or estimation techniques are used, I would encourage investors, creditors and other stakeholders to dig deeper and gather accurate information about the nature of the dispute and independently assess the potential outcome of ongoing lawsuits and claims. This exercise could prove to be difficult, considering all relevant information may not be available in the public domain and management will exercise extreme caution in releasing information that may seriously prejudice the company’s position in the legal case. In making an independent assessment, stakeholders should also consider other areas such as good governance practices in the company, as well as the reputation and integrity of key management personnel and external auditors.

Misunderstandings happen because two parties interpret and take different positions on a certain matter. No matter how the saga ends between ABS-CBN and Solar Entertainment, the losers in this dispute are clearly the existing subscribers who are forced to accept the fact that they have been shortchanged.

Nelson Charsegun L. Aquino is an Assurance Partner in the Technology, Information, Communication and Entertainment (TICE) and Methodology Leader. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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Nelson Charsegun L.  Aquino

Nelson Charsegun L. Aquino

Assurance Partner, PwC Philippines

Tel: +63 (2) 8845 2728

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