Impact of Contingent Liabilities Reclassification on Financial Performance: An Analysis with Brazilian Companies of Electricity Utilities Sector

Abstract

The main objective of this research is to verify the effect of a reconfiguration of contingent liabilities in the financial performance of Brazilian companies in the electricity sector in the years 2013 to 2015. The sample consisted of 53 companies and 153 financial statements were analyzed. The model used to reconfigure the contingent liabilities into provisions was developed by Rose (2014). The author classifies the reversal in 5 scenarios: Optimistic (20%) Partially Optimistic (40%), moderate (60%) Partially Pessimistic (80%) and Pessimistic (100%). To represent the economic and financial performance we selected three indicators: General Liquidity (LG), General Indebtedness (EG) and Return Over Assets (ROA). The results showed that for worst-case scenarios, there is a significant difference between the indicators calculated on the original data in comparison with those calculated within the reclassified scenarios. The Statistics D of Cohen (1988) pointed out that, in addition to statistically significant, in the worst scenarios, the size effect was also too high, especially for the ROA and the Indebtedness. For Liquidity the differences were not so significant. The findings of this research serve as a warning to users of financial statements and pointed out that they should be aware of the financial effect of different interpretations of the individuals involved in decisions about the likelihood of loss in provision and Contingent liabilities.