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Do you accrue for liquidating damages on the balance sheet?

Depending on the terms of the contract, a company may have to pay liquidating damages to the other party if the contract is breeched.

Liquidating damages are an example of a potential loss contingency, and the company should only accrue the liquidating damages on the balance if it is probable to occur and can be reasonably estimated. Use the guide below to determine whether or not liquidated damages should be accrued for. In an M&A transaction, the seller should make the buyer aware of any contracts that have a clause on liquidating damages.

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  • What are liquidating damages?

    Liquidating damages are the potential damages specified as the total amount of compensation in which the aggrieved party will be able to seek, if the other party involved breaches the contract. Liquidated damages are predetermined prior to entering the contract, and for it to be legally enforceable, the nature of the contract should be such...