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FAR - CPA test > Contingencies > Flashcards

Flashcards in Contingencies Deck (15):
1

What is a contingency?

An existing condition (at the balance sheet date) involving uncertainty as to a possible gain or loss that will be resolved when a future event occurs or fails to occur. Resolution of the uncertainty may confirm an increase in assets (or reduction in a liability), or the incurrence of a liability or an asset impairment.

2

What are the 3 catagories for the probability of a contingency?

Probable - Very high or near certainty

Reasonably Possibly - Neither high nor remote in occurance

Remote - Very low or remote chance of occurance

3

What do you do for a loss contingency that is probable and can be reasonably estimated at the balance sheet date ?

then an estimated loss and estimated liability will be recognized - actually recorded in the accounts in the amount estimated.

If the firm is able to estimate a range of possible losses, with no amount in the range having a higher probability of occurring than any other amount, the amount recognized in the accounts is the lowest amount in the range.

If a range of values were given but one value in the range has a higher probability assigned to it than any other, the value with the higher probability is used for reporting.

4

What do you do when the loss contingency is probable and cannot be reasonably estimated

the loss contingency should be disclosed in the footnotes to the financial statements.

5

What do you do when the loss contingency is reasonably possible

whether the loss can be reasonably estimated or not, the loss contingency is disclosed in the footnotes to the financial statements

6

What do you do when the loss contingency is remote?

the loss contingency can be disclosed in the footnotes to the financial statements. Please note that footnote disclosure is permitted but not required.

7

What do you do at acquisition, if the contingency is contractual ?

then contingent liability is recognized by the acquirer at fair value.

8

What do you do At acquisition, if the contingency is not contractual and has more than a 50% probability of becoming a definite liability when a future event occurs or does not occur?

then the liability is recognized at fair value. Otherwise, there is no recognition.

9

Waht do you do when a gain contingency is probable?

whether the gain can be reasonably estimated or not, the gain contingency is disclosed in the footnotes to the financial statements.

10

What do you do when the gain contingency is reasonably possible?

whether the gain can be reasonably estimated or not, the gain contingency is disclosed in the footnotes to the financial statements.

11

What do you do when the gain contingency is remote?

whether the gain can be reasonably estimated or not, footnote disclosure of the gain contingency is not recommended.

12

What are the 2 parts of a guarantee?

The first part is the obligation of the guarantor to be ready to comply with the guarantee if the triggering event occurs. The guarantor recognizes this liability at fair value initially even if there is no expectation of payment. The debit depends on the nature of the guarantee.

The second part is the uncertain contingent obligation - the contingent liability. This part is subject to the usual principles regarding contingent liabilities

13

What is a provision in IFRS?

a liability that is uncertain in terms of timing and amount but is not of uncertain existence. A provision is recognized if the entity has a present obligation (either legal or constructive) as a result of an obligating event that will result in an outflow that is more likely than not.

14

When a range of amounts for contingencies is given under IFRS, which is picked?

the midpoint of the range

15

When a range of amounts for contingencies is given under GAAP, which is picked?

the lowest