What it means
Many business decisions can be challenged. A company may appeal a court ruling, dispute a tax assessment or object to an insurer's refusal to pay a claim.
When the reviewing body agrees with the original decision and leaves it in place, it upholds the decision. The word also appears in the opposite direction.
When an ombudsman or regulator upholds a customer's complaint, it finds in the customer's favour and usually orders the firm to put things right. The meaning is always that the reviewer agrees with the case before it, so who benefits depends on which side made the argument.
Outcomes matter to the accounts. If a company has been ordered to pay damages and is appealing, the finance team must judge whether the ruling will be upheld and how much it will cost.
Accounting standards set a threshold for when a probable loss must be recorded as a liability, and the threshold differs between frameworks. Contingent liabilities (possible obligations whose outcome depends on a future event) are usually disclosed in the notes when the chance of loss is real but not high enough to record.
The disclosure helps readers understand the risk. Auditors often ask for letters from the company's lawyers to check the assessment of whether a decision is likely to be upheld.
Businesses also use the word in everyday terms, such as upholding a contract, a warranty or a policy. In that sense it means honouring the commitment and carrying out the terms.
A company that upholds its agreements protects its reputation and its ability to raise money. A common mistake is to treat the first ruling as final.
Appeals take time, may change the amount or direction of a result, and cost money in legal fees, so the finance team should keep its estimates under review.
In practice
Real-world examples.
Example
A court of appeal upholds a $1,500,000 judgment against a construction firm for defective work, rejecting every ground of the firm's appeal. The firm's lawyers had earlier told the auditors that this outcome was likely. The firm had made a provision of $1,000,000, so it books an extra $500,000 charge. The finance director also tells the bank that the cash outflow is due within 30 days.
Example
A tax authority upholds an assessment against a trading company after a review, rejecting the company's objection. The company must pay the extra tax of $120,000 plus interest. The tax manager considers whether to take the case to a tribunal, weighing the legal cost against the amount at stake.
Example
A financial ombudsman upholds a customer's complaint about a mis-sold insurance policy. The insurer must refund premiums of $9,000 and pay compensation of $500. The compliance team reviews similar sales for the same fault and sets aside money for further refunds if needed.
Formula
Calculation
Expected exposure = probability the decision is upheld x amount at stake
Suppose a court has ordered a company to pay $2,000,000 in damages and the company has appealed. Its lawyers estimate a 40% chance that the ruling will be upheld. Expected exposure = 0.40 x 2,000,000 = $800,000. This is a planning tool, and the accounting rules decide separately whether any amount must be recorded or only disclosed.Case study
Seen in the real world.
Granite Pharma is an illustrative, fictional company that lost a patent dispute at trial and was ordered to pay $5,000,000. It appealed, and its lawyers rated the chance that the ruling would be upheld at about 60%.
The finance director disclosed the case in the accounts, explained the range of outcomes and planned liquidity so that the company could pay if the appeal failed. She arranged a standby credit line of $5,000,000 with the company's bank, at a modest commitment fee, well before the appeal was heard.
The appeal court did uphold the ruling, and Granite paid from the credit line without disrupting its operations. The illustrative lesson is that planning for an unfavourable result is part of sound financial management, even when the company hopes to win.
Watch out
Common mistakes.
- Assuming that a decision that is upheld always goes against the business, when an upheld complaint or claim may be in its favour.
- Booking nothing while an appeal is pending, when accounting rules may require a provision if a loss is probable.
- Ignoring legal and interest costs, when the total cost of an upheld decision includes more than the headline sum.
Questions
People also ask.
What is the difference between uphold and overturn?
To uphold is to confirm the original decision, while to overturn is to reverse it.
Does an appeal stop payment?
Not always, because some courts require the amount to be paid or secured while the appeal is pending, so the company should check the rules.
When does a regulator uphold a complaint?
When its review finds that the complaint is justified, typically leading to an order for the firm to correct the problem or pay compensation.
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