The following is an excerpt from our textbook:

Not too long ago, a look at the liabilities side of the balance sheet of an international company like BERU AG, showed how international companies reported financial information. Here is how one liability was shown:

Anticipated losses arising from pending transactions

3,285,000 euros

Do you believe a liability should be reported for such transactions? Anticipated losses means the losses have not yet occurred. Pending transactions means that the condition that might cause the loss has also not occurred. So where is the liability? To whom does the company owe something? Where is the obligation?

German accounting rules at that time were permissive. They allowed companies to report liabilities for possible future events.

1. For this discussion board, I would like you to discuss the pros and cons of allowing companies to record estimated losses for transactions that have not finalized. Why would this be useful to potential investors? How could management potentially abuse this practice? Do you think the benefits outweigh the potential problems?