Contingency

Examples of Contingency in the following topics:

• Reporting Contingencies

  • Contingencies are reported as liabilities if it is probable they will incur a loss, and their amounts can be reasonably estimated.
  • A loss contingency is less than 50% likely to occur due to a past obligation.
  • Gain contingencies are reported on the income statement when they are realized (earned).
  • A probable loss contingency can be measured reliably if it can be estimated based on historical information.
  • Conservative accounting principles state that companies should report loss contingencies as they occur.

• Gain Contingencies

  • Gain contingencies, or possible occurrences of a gain on a claim or obligation involving the entity, are reported when realized (earned).
  • The disclosure of gain contingencies is affected by the materiality concept and the conservatism constraint.
  • Thus, for a gain contingency, only a realized gain is accrued for and disclosed on the income statement.
  • A material gain contingency that is both probable and reasonably estimated can be disclosed in the notes to financial statements.
  • Explain how a company reports a gain contingency on their financial statements

• Loss Contingencies

  • A loss contingency may be incurred by the entity based on the outcome of a future event, such as litigation.
  • A loss contingency is incurred by the entity based on the outcome of a future event, such as litigation.
  • Loss contingencies can refer to contingent liabilities that may arise from discounted notes receivable, income tax disputes, or penalties that may be assessed because of some past action or failure of another party to pay a debt that a company has guaranteed.
  • Unlike gain contingencies, losses are reported immediately as long as they are probable and reasonably estimated.
  • Summarize how a company would report a loss contingency on their financial statements

• Classifying Liabilities

  • Contingent liabilities can be current or long-term.
  • Contingent items are accrued if the claims and their likelihood of occurring are probable, and if the relevant amount of the liability can be reasonably estimated.

• Current Obligations Expected to Be Refinanced

  • To consolidate other debt(s) into one loan (a potentially longer/shorter term contingent on interest rate differential and fees)
  • To reduce the monthly repayment amount (often for a longer term, contingent on interest rate differential and fees)
  • To free up cash (often for a longer term, contingent on interest rate differential and fees)

• Financial Statement Notes

  • Notes to financial statements can include information and supporting data on debt, going concern criteria, accounts, contingent liabilities, or contextual information explaining the financial numbers (for example, if the company is facing a lawsuit).

• Mechanics of a Disclosure

  • Notes to financial statements can include information on debt, going concern criteria, accounts, contingent liabilities, or contextual information explaining the financial numbers (e.g., to indicate a lawsuit).
  • Notes to financial statements can include information on debt, going concern criteria, accounts, contingent liabilities, or contextual information explaining the financial numbers (e.g., to indicate a lawsuit).

• Valuing Repairs, Maintenance, and Additions

  • Such contingent liabilities can be estimated reliably based on historical cost and readily available information.

• Events Triggering Disclosure

  • Real Company Example of a Disclosure of Contingent Liability: "Various lawsuits and claims, including those involving ordinary routine litigation incidental to its business, to which the Company is a party, are pending, or have been asserted, against the Company.

• The Disclosure Process

  • Example of Disclosures of Contingencies: "A jury awarded USD 5.2 million to a former employee of the Company for an alleged breach of contract and wrongful termination of employment.