Contingencies from foreign subsidiary 2718

  • My question is … this contingency should appear in the consolidated balance sheet (at least as a note, since the litigation’s success is scored as ‘possible’) ? And if yes, is it a SOx infraction in case it should be omitted, alleging that it comes from a foreign branch (thus not under US laws) ?’ %0AI understood the original question to primarily concern the need for disclosure (on the balance sheet or in the notes) and whether non-disclosure would be a violation of the Sarbanes-Oxley Act. The question of materiality and likelihood are subquestions that arose during the discussion and they are related to the question dealing with the need for disclosure.%0AWhile I did not explicitly state that the location (foreign or US) of the consolidated subsidiary is not relevant for the question of the need for disclosure, I implied this by focusing on the question whether the amount would be material for an investor.%0AThe poster later come up with additional information about different estimates of the likelihood, however this information did not change the fact that a disclosure would be required if the amount turns out to be material.%0ASo by addressing c., I explicitly covered a. and implicitly b. (by not stating that this would permit non-disclosure). Finally I did cover d. through mentioning internal control over financial reporting and disclosure controls and procedures (including any voluntary sub-certifications submitted by subsidiaries).%0AI am still not sure whether the poster still included the non-recurring part of the tax issue (i.e. a lump sum payment for taxes relating to past years if the tax authorities considers certain expenses to be non tax-deductible or because the tax authorities increases revenues by considering old transfer prices as too low) in the total amount that he expressed as a percentage of consolidated EBIT that was above 5%. From his earlier posts and my questions about recurring and non-recurring effects it seems that the recurring effect would be lower than 5% of EBIT and that subtracting the non recurring effect from the enterprise value (or from equity) would result in a decrease in the equity value (or share price) of below 5% of the old equity value (and would thus be immaterial from the point of view of an investor). As I explained in my earlier posts one cannot include non-recurring effects in calculations as a percentage of an income statement or cash flow statement item because commonly used valuation techniques imply that the equity value is derived from income statement or cash-flow items that recur in the future. Negative one-time effects either need to be added to net financial debt (and thus result in lower equity) or need to be directly subtracted from equity. The intuitive reasoning is that an investor cares more if 6% of the EBIT is lost EVERY year in the future (i.e. 6% per year) than if 2% of the EBIT is lost every year and the remaining 4% need to be paid only once but not again in the future.

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