The company to highlight on their contingent liabilities is Merck & Co., Inc. (MRK).
One of the liabilities in the financial statements is listed under contingent liabilities but in the
notes broke down in the fair value category. Listed in the footnotes is the description of the
holding of these funds for future royalty payment on a joint venture that was terminated. In
preparation of having to pay these to the investors Merck has set aside in their contingent
liabilities the ability to carry the fair market value of this amount in their statements. The liability
recently took an increase when the discount rate on the value was reduced by 2%. While the
company only disclosed this liability in the footnotes there is amble detail and breakdown on all
considered in the contingent liabilities’ holdings.
While auditors can ask management for a list of contingent liabilities it is up to the auditor to
research this further. The auditor can perform further inspection on the reporting of the
dissolution of the joint venture to ensure that any future expenses for this separation are being
accounted for. Where they will find in the contingent liabilities the withheld fair value on the
products sold under this umbrella and allocated accordingly. Garcia writes that four procedures an
auditor can take to search for contingent liabilities are in the following. Search for undisclosed
contingencies in minutes of board meeting to find potential problems, undisclosed lawsuits for
example. Evaluate materiality and determine if the correct amount is allocated for the purposes, if
this seems inflated or to low. Evaluate event likelihood by determining the actual posing threat, is
this highly probable or just a maybe. This can also be used if an amount for the potential problem
is undeterminable. Lastly, pay attention to the "maybe" column on contingent liabilities. Often
times these need to be only disclosed in the footnotes however, “liabilities that are probable and
can be estimated, need a specific accounting journal entry" (Garcia, 2016).
Uber Technologies, Inc. (Uber) as my company for my discussion topic of this week. When reading
and interpreting the information reflected in the 10-K form, filed on 12/31/2021, I found that Uber
in its financial presentation, estimated a liability for contingencies related to non-tax and litigation
matters of the normal course of business. These contingencies amount to $2.2 billion, of which
$1.3 billion correspond to matters not related to income tax. In note 15 of the 10-K form it is
mentioned that Uber is under domestic and foreign audits, and this audit corresponding mainly
from its transactions with drivers, and from the tax treatment of certain employee benefits and
related employment taxes matters, that were probable and reasonably estimable. It is also
mentioned in this note, that the main audit procedure in which they are involved is with the
United Kingdom and is involved the presence of the HMRC (UK tax regulator) which is seeking to
classify them as a transportation provider. Being classified as a transportation provider would
result in a VAT (20%) on Gross Bookings or on the service fee that they charge Drivers, both
retroactively and prospectively. They mentioned in the text: “HMRC is considering a number of
factors, including driver, passenger and business-to-business contractual arrangements, and HMRC
is also expected to consider the UK High Court ruling of 19 February 2021 on the worker
classification of drivers, to determine whether we (Uber) should be classified as a provider of
transportation services” (SEC.gov/Archives/Edgar/data…, 2022). It is also mentioned that if they do
not agree a satisfactory resolution with the HMRC, they would move the case to the United
Kingdom Tax Court because they consider that they have a meritorious defense in this process. As
of the date of the filing of the 10-K form with the SEC, Uber was unable a specific any amount
which may be subject to the ruling of the British tax court to predict the specific contingency, so it
was mentioned in the footnotes.
With respect to audit procedures to identify contingent liabilities, we could evaluate some of the
examples mentioned in our McGraw Hill Education literature: “1) Reading the minutes of meetings
of the board of directors, committees of the board, and stockholders ; 2) Reviewing contracts, loan
agreements, leases, and correspondence from government agencies; 3) Reviewing tax returns, IRS
reports, and schedules supporting the entity's income tax liability; 4) Confirming or otherwise
documenting guarantees and letters of credit obtained from financial institutions or other lending
agencies; and 5) Inspecting other documents for possible guarantees or other similar
arrangements" (Messier, Glover, & Prawitt, 2017). In the case of Uber that I choose for my
participation this week, I would consider the possibility of including expert lawyers in local tax
matters as a part of the audit team, so that they review all the possibilities and existing
jurisprudence in similar cases, trying to minimize the possible impact of the results from the
official UK body.
References:
https://www.sec.gov/Archives/edgar/data/1543151/000154315122000008/uber-
20211231.htm#i41f3a487140149eaa115f268f79d2e06_112
https://www.gov.uk/search/all?keywords=case+with+Uber+Vs+HMRC&order=relevance&page=2
https://news.bloombergtax.com/daily-tax-report-international/ubers-u-k-court-loss-leaves-behind-
2-1-billion-tax-question
https://prod.reader-ui.prod.mheducation.com/epub/sn_58f0c/data-uuid-
fc972a9186104c0296511489324ca396#data-uuid-ee91a04ef0fe449fa369e3db82938416
Garcia, M. (2016, October 26). GAAP guidelines for contingent liabilities. Small Business -
Chron.com. Retrieved October 13, 2022, from https://smallbusiness.chron.com/gaap-guidelines-
contingent-liabilities-67481.html
SEC. (2022). Merck & Co., Inc. MRK on NYSE. Edgar Entity Landing Page. Retrieved October
13, 2022, from https://www.sec.gov/edgar/browse/?CIK=310158&owner=exclude
