The Flexibility Of Accounting Treatments On Contingencies

Because of the complexity of the economy, contingency, as a special economic event, has been wildly existed in the business of enterprises and increasingly valued by both the academics and practice sector. Sometimes companies have a huge amount of financing and debt service without comprehensive reflection in their financial reports. This is resulted from the consideration of earnings management and reputation, making financial accounting deviate from its function, negatively affecting the quality of accounting information, and finally leading to the situation that the objective of financial reporting cannot be attained.Through the study, the author discovered the fact that enterprises could manipulate the determination, measurement and disclosure of contingency, in many cases they take the advantage of the flexibility of accounting treatment, that is, the option that the accounting system endowed and the loss of restraint to such behavior in accounting system.In transactions which involve contingency, uncertainty is the fundamental property. Such uncertainty, which causes deviations in accounting treatment, together with the flexibility of accounting treatment, which provides options to enterprises, finally lead to the fact the enterprises could manipulate the determination, measurement and disclosure of contingencies based on its "professional judgment". On the basis of academic research, the author, through positive analysis of the implied relation between the determination of contingency and the earnings management and financial indicators of the company, has demonstrated the fact that enterprises has the motivation of manipulating the determination of contingencies according to its own circumstance.Although the author find the fact, however, because enterprises face different contingencies, they would be constrained by the accounting system and their report cannot reflect the essence of its business, if the accounting treatment of contingency being strongly limited; on the other hand, enterprises may abandon the good purpose of accounting system, making unreasonable judgment, if they were given excessive flexibility. Based on the current situation, the author considers that in order to create a good economy and to promote the healthy development of enterprises, decreasing the flexibility concerning contingency given to companies, strengthen the external supervise and enhance the ethics standard of enterprises, are necessary.This article includes the following five parts.1. Introduction. In this part the author introduce the background of selecting to study in this field, the current situation of accounting treatment in contingencies, and the theory category as well as the research technique of this article.2. The basic accounting theory concerning the treatment of contingency. In this part the author will introduce the basic theory of the determination of contingency and the accounting for contingency. Through the illustration of problems in this area, the author led us to the issue of the flexibility in accounting contingencies which is shown in third part of the article.3. Theoretical analysis of accounting for contingencies. Undertaking the contends in part 2, the part 3 will first introduce the issues about the flexibility in accounting system, and then analyze the reason for the generation of the flexibility in accounting contingencies from both the objective factors and the subjective factors. Accordingly, the author introduces relative laws and regulations; gives deeper discussion on the subjective factors on accounting contingencies; and points out that the unreasonable use of professional judgment in accounting contingencies is a serious problem currently. At last, the author discuss the impact that the flexibility in accounting contingency on enterprises.4. Positive analysis on the flexibility in reporting contingencies—based on the determination of contingencies. This is the positive analysis part in this article, a research in the Chinese listed companies'determination of contingencies.5. Conclusions and recommendations. Through the positive analysis the author find problems existed in the determination of contingencies; and provide recommendations to these problems.