Chapter FAR 6 - Contingency Flashcards Preview

FAR CPA Review - (Becker, Roger, Wiley CPA Excel, NINJA) > Chapter FAR 6 - Contingency > Flashcards

Flashcards in Chapter FAR 6 - Contingency Deck (10):
1

What is the accounting for contingencies that are

a) Probable
b) Reasonable possible
c) Remote
???

Probable (and reasonably estimate) = Record on the financial statements

Reasonable possible = Disclose in the footnotes of financial statements.

Remote = Ignore. No reporting on financial statements, no disclosure in footnotes to the financial statements.

2

IFRS definition for:

a) Probable
and
b) Possible

IFRS

Probable = more likely than not to occur

Possible = may but probably not occur

3

What do you do when you have a PROBABLE loss and the loss is estimate-able?

Record the loss right away on the financial statements. Make a disclosure note on it.

4

What do you do when you have a reasonable possible loss?

Disclose this reasonably possible loss in the footnotes only.

Do not report this type of loss on the financial statements as a contingent liability.

5

What do you do with a remote loss?

Ignore the remote losses.

Do not disclose them in the footnotes to the financial statements.

6

What are the exceptions to never disclose remote losses?

Other words, when do you have to disclose a remote loss?

Exception to remote losses:

Disclose a remote loss when dealing with guarantee types on:

1) Debt of others guaranteed (officer/ related person)

2) Obligation to pay back to commercial bank under stand-by letters of credit.

3) Guarantees to repurchase receivables (or related property) that have been sold or assigned.

7

Accounting treatment towards

Probable and estimate gain

Disclose the gain in the footnotes.

Only report the gain on the financial statements in the year that you actually receive it (usually in year-later)

Example: Year 1 - very probable that company get a gain from a winning a lawsuit against 3rd party.
>>> Disclose this gain on the footnotes only.

Year 2 - company receives the gain from the 3rd party.
Report the gain on the financial statement.

8

Accounting treatment towards

Probable loss and estimate range of losses (like at a minimum of this much up to this much) and these estimates are not as good as the others.

Report the the minimum amount on the estimate loss range.

Example: Company has a high probability to lose a lawsuit. Estimate to pay to the receiving party is between $23,000 to $100,000.

On the financial statement, report liability of $23,000

9

Accounting treatment towards

Probable loss and estimate range of losses (like at a minimum of this much up to this much) and there is based that there is this one amount that is very likely to be the actual loss amount.

Whenever a company has a range of probable losses and there is evidence that there is an amount that the company has to pay,

Then, on financial statements report this most likely contingent loss amount.

Example: Company has high probability to lose a lawsuit. Company is estimated to pay between $50,000 and $200,000. But, it's most likely $130,000 based on the evidence.

On the financial statement, report this $130,000 amount because there is evidence/proof that this is the amount.

10

Accounting treatment towards:

Probable and estimate loss but covered with insurance and there's a deductible amount.

In cases of a probable and estimate loss, when insurance is involved to cover the costs, the deducible amount (the amount the company is going to pay while the insurance company covers the rest) is the amount to be reported on the financial statements.

Example: Big fire at warehouse costing $500,000.
Company has $10,000,000 insurance policy with a deductible of $150,000.

The company will report $150,00 deductible as the contingent liability on the financial statements. This because the insurance covers the rest. And the company reports what it has to pay.

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