Research Case 13-11 Reporting and researching contingencies

What are contingencies?

Contingencies exist when a company has an existing circumstance as of the date of the financial statements that may cause a gain or loss in the future, depending on events that haven’t yet happened and, indeed, may never happen.

Loss Contingencies

A loss contingency is a charge to expense for what is considered to be a probable future event, such as an adverse outcome of a lawsuit. A loss contingency gives the readers of an organization's financial statements early warning of an impending payment related to a likely obligation.

If the amount of such a loss cannot be reliably estimated and is not considered probable, an entity may still choose to discuss the item in the footnotes that accompany its financial statements.

FaSB guidelines

The specific citation that specifies the guidelines for accruing loss contingencies is FASB ACS 450-25-2: "Contingencies-Loss Contingencies-Recognition-General Rule."

Specifically, the guidelines are that an estimated loss from a loss contingency be accrued by a charge to income if both of the following conditions are met: 1. Information available to prior issuance of the financial statements indicates that it is probable that an asset had been incurred at the date of the financial statements. 2. The amount of loss can be reasonably estimated

Biblical Integration: James 4:14

"Yet you do not know what tomorrow will bring. What is your life? For you are a mist that appears for a little time and then vanishes"

Kraft vs. Starbucks

Due to the nature of this contingency, the loss was accrued until it was paid in the fourth quarter of fiscal 2013.

Discussion Question: If the litigation was taken care of in the first quarter of fiscal 2014, why is it still included in the notes to the financial statements for 2016?

John deer licensing agreement

The nature of the contingency is remote.

John Deere

discussion question: if the amount of the contingency is known and the nature is remote why is it included in the notes?

Gain Contingencies: Apple vs. Samsung

Gain Contingencies

Gain contingencies include events that could possibly result in future cash inflows. Gain contingencies are not recorded.

  • Possible future sources of cash from the sale of assets or other sources, such as gifts.
  • Ongoing tax examination that may result in adjustments in the company’s favor, resulting in a tax refund.
  • Ongoing litigation that may result in cash awards in the company’s favor.
  • Future tax loss carryforwards that may reduce income tax payable in the future.
  • Nature of contingency in 2015: unrealized gain contingency
  • Disclosed but not accrued (conservatism)
  • Nature of contingency in 2016: realized gain contingency
  • Disclosed and reported in net sales
  • 2015: unrealized gain contingency
  • Disclosed but not accrued (conservatism)
  • 2016: realized gain contingency
  • Disclosed and reported in net sales
  • 2015: unrealized gain contingency
  • Disclosed but not accrued (conservatism)
  • 2016: realized gain contingency
  • Disclosed and reported in net sales

Discussion question: How does the principle of conservatism impact the treatment of loss vs. gain contingency?

thank you!

Credits:

Created with images by Bessi - "tree sunlight background" • werner22brigitte - "glowing sun rise canim lake" • tpsdave - "zion national park utah landscape" • tpsdave - "yellowstone national park wyoming hdr" • tpsdave - "turkey sunset dusk" • Randy Heinitz - "Carolina Morning" • tpsdave - "czech republic sunrise dawn" • tpsdave - "yellowstone national park wyoming landscape" • thisamericanmouth - "Blueblocker Experiment: 4" • tpsdave - "hudson bay canada sea" • tpsdave - "glen canyon utah landscape" • tpsdave - "sunset twilight dusk" • freestock.ca ♡ dare to share beauty - "Hopewell Scenery - HDR" • Maggie-Me - "Background" • tpsdave - "patagonia landscape valley" • freestock.ca ♡ dare to share beauty - "Great Falls - HDR" • © Axel Naud - "It's rainy outside.." • tpsdave - "central park new york city road" • tpsdave - "zion park utah mountains"

Made with Adobe Slate

Make your words and images move.

Get Slate

Report Abuse

If you feel that this video content violates the Adobe Terms of Use, you may report this content by filling out this quick form.

To report a Copyright Violation, please follow Section 17 in the Terms of Use.