Published on RAW (https://raw.rutgers.edu)

Home > 2.1.5 The specification of contractual terms in the measurement model

2.1.5 The specification of contractual terms in the measurement model

One clear shortcoming of today’s reporting model is its focus on realized operations and its ignorance of a large set of tacit and contractual obligations that often determine much of future economic activity. Organizations, their clients, their business partners, and suppliers are linked by a network of contracts that are formal and informal. Many of these contracts present larger liabilities for future operations than most reportable events. For example: * a power utility may have a fuel supply contract that is 10% over current market price for the next 10 years * a business concern may outsource most of its supply chain and as a result may have consensual obligations even if these are not contractual * A business concern that has “return” agreements with their clients for inventory that is obsolete or cannot be used or sold * Company with a long term practice of supporting local and communal projects to enhance the environment * Company with many social welfare practices relative to the employees that cannot be stopped * Company with passive obligations for environmental cleanup that are not recognized These types of instances and the non-reported legal contingencies are often much larger than the liabilities typically reported in annual reports under contingencies. Only a probability-based system of contingency reporting can provide the necessary description that is useful and realistic in this an information society. Where clear obligations (and benefits) are not available a deeper standard of disclosure applies where disclosure must be prepared such as: * legal, operational, and contractual contingencies * management compensation contracts at a much deeper level…(including a taxonomy of types of compensation) * Hyperlinks to fuzzy contracts or non-standard financially engineered contracts * Description of corporate litigation * Description of government investigations * Etc.

Source URL: https://raw.rutgers.edu/node/24