SLN - Ch 13 # 2

SLN - Ch 13 # 2: Contingencies & Warranties Contingencies: "An existing condition, situation, or set of circumstances involving uncertainty as to possible gain(gain contingency)or loss(loss contingency)to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur." Gain Contingencies: TypicalGain Contingenciesare: 1. Possible receipts of monies from gifts, donations, asset sales, and so on. 2. Possible refunds from the government in tax disputes. 3. Pending court cases with a probable favorable outcome. 4. Tax loss carryforwards (Chapter 19). Gain contingencies arenot recorded (a.k.a. no journal entry is recorded). They are disclosed only if probability of receipt is high.Conservatism principle Loss Contingencies -Involve possible losses FASB uses three types of probability in determining how to treat loss contingencies Probable - future events are likely to occur -Accrue & Disclose in Footnotes Reasonably possible - the chance of future event occurring is more than remote but less than likely -Disclose in Footnotes Remote - the chance of future event occurring is slight -Ignore Common loss contingencies: 1. Litigation, claims, and assessments (These are discussed below)You do need to know this for the 2. Guarantee and warranty costs (These are discussed below)Final exam 3. Premiums and coupons (NOT discussed below - refer to your book for more info)Don't need to know for 4. Environmental liabilities (NOT discussed below - refer to your book for more info)Exam Litigation, Claims, and Assessments Companies must consider the following factors, in determining whether to record a liability with respect to pending or threatenedlitigationand actual or possibleclaimsandassessments. 1)Time period in which the action occurred. 2)Probability of an unfavorable outcome. 3)Ability to make a reasonable estimate of the loss. Companies shouldrecorda loss contingency when: a)Information is available before the financial statements are issued (not necessarily before the date of the financial statements - but date of cause or incident must be before f/s date), indicates a loss is probable. b)The amount can reasonably be estimated c)Both of these need to be met at the same time