Accounting For Contingencies Disclosure Of Business Risks 2012

Accounting for
Contingencies:
Disclosure of Future
Business Risks
B Y J O N A T H A N S C H I F F, C M A , P H . D . ; A L L E N S C H I F F, P H . D . ; AND HANNAH ROZEN, PH.D.

IN THIS ARTICLE, THE AUTHORS
TINGENCIES AND COMPARE

PROVIDE A CONCISE REVIEW OF ACCOUNTING FOR CON-

U.S. GAAP AND IFRS

REQUIREMENTS RELATED TO POTEN-

TIAL GAINS AND LOSSES. THEY ALSO INCLUDE SOME CONTEMPORARY ILLUSTRATIONS THAT DEMONSTRATE HOW SOME COMPANIES ARE COMPLYING WITH FINANCIAL REPORTING REQUIREMENTS FOR CONTINGENCIES.

ccounting and reporting for
contingencies—that is to say, potential
gains and losses—is a topic that is not regularly on the front burner of finance and accounting professionals. It usually is covered in just a few pages in the standard intermediate accounting college textbook. Now, however, the

increase in recession-induced merger and acquisition
activity, the enhancement of executive exposure as a
result of the Sarbanes-Oxley Act (SOX), and the business leadership focus on global risk management all point to the need for a renewed focus on accounting for
contingencies. Also, related disclosures can shed valuable light on the potential of corporations to meet future reported earnings and cash flow goals.
Accounting Standards Codification® (ASC) 450, “Con-

tingencies” (formerly Statement of Financial Accounting Standards No. 5 (SFAS No. 5), “Accounting for Contingencies”), applies to both gain and loss contingencies. With the exception of tax loss carryforwards, gain contingencies are not generally recognized because

they could result in recognition of revenue before it is
realized. In contrast, many types of loss contingencies
are recognized. Principally, these include loss contingencies that result in liabilities, as well as those that involve asset impairments. ASC 450-20-25 (450, Contingencies; 20, Loss Contingencies; 25, Recognition) requires consideration of the likelihood that a contingency will be realized, as well as an assessment of whether the amount of the loss is reasonably

estimable.1 Likelihood estimates range along a continuum from probable to reasonably possible to remote. In

A

M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY

1

SPRING 2012, VOL. 13, NO. 3

necessary. A loss contingency is an existing condition,
situation, or set of circumstances involving uncertainty as
to possible loss to an entity that will ultimately be
resolved when one or more future events occur or fail to
occur.5 Generally, contingencies in this category are
considered loss contingencies either because of a potential liability or a potential asset impairment. Examples of contingent liabilities include pending or threatened litigation, claims and assessments, and product warranties and defects. Those that involve asset impairments

include collectability of receivables and threat of expropriation of assets.

general, loss contingencies are recorded when the likelihood of loss is probable and the amount is reasonably estimable. Both recorded loss contingencies and nonrecorded loss contingencies are subject to disclosure. International Accounting Standard (IAS) 37, Provisions, Contingent Liabilities and Contingent Assets, from the International Accounting Standards Board (IASB) is the

principal international counterpart to ASC 450. Whereas
ASC 450 focuses on the income statement (i.e., gains
and losses), IAS 37 focuses on the balance sheet (i.e.,
recognition of an asset or liability/provision). Similar to
the stipulations in ASC 450, unless realization of
income is “virtually certain,” IAS 37 does not permit
the recognition of contingent assets. For liabilities, IAS
37 requires consideration of the likelihood that “an outflow of resources embodying economic benefits will be required to settle the obligation,” as well as an assessment of whether the amount of the obligation is reasonably estimable.2

Treatment of Loss Contingencies
As contingencies are by nature...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Business Accounting Essay
  • A BUSINESS CONTINGENCY PLAN Essay
  • M2 business accounting Essay
  • Chapter 1 Accounting in Business Essay
  • risk Essay
  • Business Contingency Plan Research Paper
  • THE ROLES OF ACCOUNTING ON BUSINESS AND OUR SOCIETY Essay
  • accounting Essay

Become a StudyMode Member

Sign Up - It's Free