Contingent Liability

Facts:

You are auditing a very successful and highly profitable manufacturing company as of December 31, 2020.

The Company has always maintained adequate insurance in different areas. The Company has decided, effective January 1, 2021, not to purchase insurance against risk of loss that may result from injury to others, damage to the property of others, or interruption of its business operations.

The Company would like to record a $5,000,000 reserve as of December 31, 2020 for claims associated with future events which may occur.

Required:

1. Should the Company record this $5,000,000 Reserve for Claims (a contingent liability) in its 12/31/2020 Financial Statements? Why or why not?