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Defi nition of Contingency
An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss when one or more future events occur or fail to occur
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Conditions Necessary For Accruing A Contingency As A Charge To Income
- 1. Info available prior to issuance of fi nancial statements indicates that it is probable that an asset has been impaired or a liability incurred
- 2. Amount of the contingency can be reasonably estimable
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Action To Take When Reasonable Estimation A Loss Is A Range
- 1. When some amount in range is better than the rest, that amount is accrued
- 2. When no amount is better than any other estimate, the minimum amount in the range is accrued
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10 Examples of Loss Contingencies
- 1. Collectability of receivables
- 2. Obligations related to product warranties and product defects
- 3. Risk of loss or damage of enterprise property by fire, explosion, or other hazards
- 4. Threat of expropriation of assets
- 5. Pending or threatened litigation
- 6. Actual or possible claims and assessments
- 7. Risk of loss from catastrophes3
- 8. Guarantees of indebtedness of others
- 9. Obligations of commerical banks under "standby letters of credit"
- 10. Agreements to repurchase receivables that have been sold
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3 Ranges of Likelihood For Loss Contingency
- 1. Probable: future event likely to occur
- 2. Reasonably possible: chance of future event occurring is more than remote but less than likely
- 3. Remote: chance of future event occurring is slight
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3 Examples of Uncertainties That Are Not Contingencies
- 1. Depreciation - eventual expiration of the utility of the asset is not uncertain
- 2. Recurring repairs, maintenance, and overhauls, which interrelate with depreciation
- 3. Amounts owed for services received, such as advertising and utilities
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