Flashcards in Contingent Liabilities Deck (11):
Under IFRS, what are contingent liabilities called? What percentage of likelihood that they will occur requires accrual? If there is a range of potential amounts, which is accrued?
They are called provisions
50% or more likelihood and amount is estimable - must accrue the median amount of the range and they are no longer considered to be CONTINGENT but are rather a RECOGNIZED liability
Rule for all liabilities?
All liabilities result from past events, even contingent liabilities
Under GAAP, what percentage of likelihood (approximately) must be met in order to accrue a contingent liability. If you have a range of possibilities, what amount do you accrue?
70% and reasonably estimable, accrue the smallest OR most likely amount in the range (this is an EXCEPTION to conservatism principle - don't want companies reporting gains due to overstating liabilities)
What disclosures are required for warranties?
Firms must disclose the accounting policy with respect to warranty accounting, and disclose a schedule of the changes in the warranty liability for the period (increases due to expense, decreases due to claim service)
What is required when a loss contingency is remote?
May but are not required to disclose
Do you adjust accrued warranty liabilities when the warranty period expires without all of the claims being filed?
No - you only adjust the accrual for the actual amount of the claims. No reversals at the end of the warranty period.
If a gain is probable, what should you do?
You would also disclose a possible gain that is not probable but could materially affect the statements
When a contingent liability is accrued, is disclosure still required?
Are the following contingent or definite liabilities?
Warranties established through a contract
Guarantee of a subsidiary note payable
Gift cards, unearned revenue, and warranties established through a contract are definite
Compensated absences, frequent flier, and guarantee of a sub's note payable are all contingent
How does self-insurance affect accrual of a loss on lawsuit?
Ignore it - only impact is that loss won't be limited by insurance deductible