When faced with a lawsuit you have to know whether or not to consider contingencies. According to Schroeder, Clark, and Cathey (2005) a contingency is a future event that could possibly have an impact on the firm. There are four different ways a contingency should come to view and they are income tax disputes, notes receivable discounted, accommodation endorsements, and what this company is dealing with a pending lawsuit. When a gain is possible, the financial statement should not record it until it occurs. When a loss is possible it is recorded when it is likely to occur. The Financial Accounting Standard Board breaks down three criteria to determine if a loss should be recorded.
A company must first consider if there is a possibility of a loss. The Financial Accounting Standards Board (2010) website states that the three ways a contingency is a loss is probable, reasonably possible, and remote. The Generally Accepted Accounting Principles states that only two of these must be recorded while the other one does not have to be.
When figuring whether or not the firm has to record a contingency loss they have to figure out first if they fall into one of the three criteria. A probable contingency means that the event in the future is likely to occur. If this is the case then the company is required to report the loss on the financial statements and in which accounts the loss would take place. If there is a reasonable possibility, which means that there is a good chance of a loss, then the company is required to report the loss to the specific accounts and not to the a statements. If there is a remote chance, then the company is not required to report anything. Since there is a likely possibility of losing the case, the company must report its loss because of the restructuring of the mortgage.
Financial Accounting Standards Board. (2010). Accounting standards...