Contingencies

Contingencies are vague and very hard to give a concrete estimate but the way they are treated is based off of the loss. Contingency requirements are broken down into three parts.

* First the company must decide whether the and how the account for a contingency is to verify its existence.

* Secondly, is the loss contingency known by the entity and has it been determined where on a continuum from “remote to reasonably possible, to probable”.

* Thirdly the entity has to carry out whether or not if it’s probable. If it’s probable loss must be incurred at the date of the financial statement and the amount that has been lost has to be reasonably estimated and the entity must accrue he loss and give the related information. The actual purpose for these conditions is “require recognition in the current period’s financial statements when losses associated with the current or prior period are reasonable estimable” (Accounting for Contingencies p. 2).

If there is no probable loss then the loss cannot be reasonably estimated and the entity has to disclose all general information.

If the client loses the lawsuit then an EPA investigation of possible violation of clean air laws, pending at year-end, and for which the outcome will not be known until after the financial statements are issued. The likelihood must be assessed that the company will pay penalties, and if so, what the payment amount will be. Generally accepted accounting principles require that the likelihood that the future event(s) will confirm the incurrence of the liability (Current Liabilities and Contingencies 2011 p.706)

Work Cited

Jonathan Schiff, CMA PhD., Allen Schiff PhD., Hannah Rozen PhD. 2012 Accounting For Contingencies: “Disclosure of Future Business Risks”

McGraw-Hill 2011 Current Liabilities and Contingencies