Accounting for Contingencies.. a Reaction

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Submitted for the subject MBA ADM B003

Articles on Accounting

TITLE: Accounting for Contingencies: Disclosure of Future Business Risks

INTRODUCTION

The authors of this article provides a concise review of accounting for contingencies and compares accounting standard bodies U.S. GAAP and IFRS requirements related to potential gains and losses. They also include some contemporary illustrations that demonstrate how some companies are complying with financial reporting requirements for contingencies.

SYNTHESIS

The article is centered on contingencies which in more understood form is “potential gains and looses”. Although accounting for contingencies already exists in standards created by known U.S. and international accounting bodies, it is not until the start of 2008 that companies started using.

It presented the two kinds of contingencies: gain contingency and loss contingency. In treating these contingencies, the authors compared the differences of the factors or tools in the treatment as per U.S GAAP and IFRS standards. The very details of the guidelines are not included but the article effectively provided the core concepts of these. It answered the basic questions of “when to include in the disclosure” and “when to include in the financial statements”.

More discussions were put in the loss contingencies as there are more guidelines on these than the gain contingencies.

Common forms of loss contingencies are also discussed here which include litigation, environmental liabilities, guarantees and, product warranties. In the discussions, the authors used actual cases of known firms where these loss contingencies can be demonstrated. Microsoft Corporation is used on the litigation example; Energizer for the environmental liabilities and; General Motors for the product warranties.

In the last part, it mentioned about an attempt to introduce an enhanced guideline for contingency disclosure on 2008 but it was never implemented....