| 1 |
Contingency
defined--An existing condition, situation, or set of
circumstances
involving uncertainty as to possible gain or loss to an enterprise that
will ultimately be resolved when on or more future events occur or fail
to occur. Resolution of the uncertainty may confirm the acquisition of
an asset or the reduction of a liability or the loss or impairment of
an
asset or the incurrence of a liability. |
| 3 |
Ranges of likelihood
that the
future event will confirm the loss: |
|
a. |
Probable--The
future
event or events are likely to occur. |
|
b |
Reasonably
possible--The
chance of the future event or events occurring is more than remote but
less than likely |
|
c. |
Remote--The
chance
of the future event or events occurring is slight. |
| 4 |
Examples of loss
contingencies |
|
a. |
Collectibility of receivables |
|
b. |
Obligations related to product
warranties
and product defects |
|
c. |
Risk of loss or damage of
enterprise property
by fire, explosion, or other hazards. |
|
d. |
Threat of expropriation of assets |
|
e. |
Pending or threatened litigation. |
|
f. |
Actual or possible claims and
assessments |
|
g. |
Risk of loss from catastrophes
assumed by
property and casualty insurance companies including reinsurance
companies. |
|
h. |
Guarantees of indebtedness of
others. |
|
i. |
Obligations of commercial banks
under "standby
letters of credit" |
|
j |
Agreements to repurchase
receivables that
have been sold. |
| 6. |
Establishes GAAP for
loss contingencies
only--Gain contingencies still governed by ARB No. 50. |
| 8 |
An estimated loss from
a loss
contingency shall be accrued by a charge to income if both of the
following
conditions are met: |
|
a. |
Information available prior to
issuance
of the financial statements indicates that it is probable
that
an asset has been impaired or a liability incurred at the date of the
financial
statements. |
|
b. |
The amount of the loss can be reasonably
estimated. |
| 9 |
Disclosures: Nature of
the accrual
and in some circumstances the amount accrued may be necessary for the
financial
statements not to be misleading |
| 10 |
Nonaccrued losses:
Disclosure
of the contingency is necessary when there is at least a reasonable
possibility
that a loss may have been incurred. Disclose the nature of the
contingency
and give an estimate of the possible loss or range of loss or state
that
such an estimate cannot be made. |
| 11 |
Disclosure of losses
or loss
contingencies occurring after the date of the financial statements but
before those financial statements are issued may be necessary to keep
the
financial statements form being misleading. In some cases, disclosure
may
be best made by supplementing the historical cost statements with pro
forma
financial data giving effect to the loss as if it had occurred at the
date
of the financial statements. |
| 12 |
Disclose the following
types
of contingencies, even if possibility of loss is remote. |
|
a. |
guarantees of indebtedness to
others |
|
b. |
obligations of commercial banks
under "standby
letters of credit." |
|
c. |
guarantees to repurchase
receivables |
| 14 |
No disclosure or
accrual of
general or unspecified business risks. |
| 15 |
Retained earnings may
be appropriated
for loss contingencies provided that it is shown within the
stockholders
equity section and is clearly identified as an appropriation of
retained
earnings. Costs or losses cannot be charged against the appropriation
and
no part of the appropriation shall be transferred to income. |
| 17 |
Gain
contingencies: |
|
a. |
are not
reflected
in the accounts since to do so might recognize revenue prior to its
realization. |
|
b. |
adequate disclosure should be made
of gain
contingencies, but avoid misleading implications as to the likelihood
of
realization. |