1996 Electronics Industry Environmental Roadmap - Civil and ...

Appendix H. Contingent Liabilities Related to Mandatory Disposition
Appendix H
Mandatory electronics products disposition programs will create financial liabilities for firms.
Firms may be required to reduce current-period profits by the non-discounted disposition costs
for all past- and current-period sales. In subsequent periods, firms will have to reduce profits by
the anticipated disposition costs for all current-period sales; this will lower future profits.
Although the exact amount (and even the timing) of the future obligation is uncertain, financial
accounting rules often require current-period profits to be lowered by the expected amount of
these future liabilities. Liabilities that are uncertain in amount and/or due date are called
contingent liabilities.
If the recent initiatives in Europe, Japan, and the U.S. become law, they may create substantial
contingent liabilities for some electronics-industry firms. When faced with contingent liabilities,
the firm can ignore the contingency (i.e., not make any public disclosure), report the existence of
the contingency in a note attached to the financial statements (but not estimate the magnitude of
the contingency), or actually reduce current-period profits by the expected future payment (i.e.,
make an accrual that reduces net income and net worth). Which of these accounting treatments
are used depends on the probability that the contingent liability will actually be paid, the
estimability of the contingency, and the accounting standards and practices used in the country
where the firm is issuing its financial-accounting report.
The following sections provide: 1) a review of the country-specific financial accounting
standards relating to disclosure of contingent liabilities for Germany, Japan, Sweden,
Switzerland, The Netherlands, and the U.S.; 2) a review of the International Accounting
Standards relating to disclosure of contingent liabilities; and 3) an analysis of whether the
product end-of-life activities discussed in preceding sections are likely to require recognition of
new contingent liabilities on the financial accounting statements of affected electronics-industry
firms.
Germany
German accounting standards derive from several sources, including the German Commercial
Code, pronouncements of the German Institute of Certified Public Accountants, and the German
Stock Corporation Law and Limited Liabilities Companies Law [41]. All contingent losses that
are likely to occur must be accrued on an estimated basis. A contingent liability that has not been
accrued must be disclosed on the face of the balance sheet or in the notes. The Commercial Code
[paragraph 251] requires that the disclosure differentiate between contingent liabilities relating
to: the issuance and transfer of notes receivable; guarantees; warranties; and security granted for
third party liabilities ([41], p. G-13).
Japan
Japanese accounting standards and practices are derived from a number of Japanese laws, pronouncements,
and historical practices [41]. Contingent losses [guhatsu saimu] must be accrued if
both of the following conditions are met: 1) information available prior to the issuance of the
financial statements indicates it is probable that an asset had been impaired or a liability has been
incurred at the date of the balance sheet, and 2) the amount of loss can be reasonably estimated.
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