ThyssenKrupp, in interim financial statements for the first quarter ending Decem ber 31, 2007 (a company with a year-end of September 30), disclosed a possible contingent liability related to payments received from the Italian government related to a special price for electricity purchase by the company's Italian division.
The European Union has ruled the payments to be inadmissible and has asked Italy to recover the money paid to ThyssenKrupp under this arrangement. The company has filed a lawsuit regarding this decision, but it has not been resolved yet. According to the footnote, "If the outcome of the legal case is unfavorable, a material effect on the consolidated financial statements of ThyssenKrupp cannot be ruled out."
a. How would the auditors determine whether this contingent liability should be disclosed or recognized in the financial statements?
b. Because the contingent liability is disclosed, what must be true about it?