Suppose that a company has a facility located where disastro

Suppose that a company has a facility located where disastrous weather conditions often occur. Should it report a probable loss from a future disaster as a liability on its balance sheet? Explain.

Solution

A liability is an obligation which is created by past events, not future events. Under no condition a probable loss related to a future event can be reported as a liability on its balance sheet regardless of its probability. The compnay would report the loss in the period in which any disaster occurs.