300774 Contingency Liability 3B Flashcards
In 20X1, a personal injury lawsuit was brought against Halsey Co. Based on counsel’s estimate, Halsey reported a $50,000 liability in its December 31, 20X1, balance sheet. In November 20X2, Halsey received a favorable judgment, requiring the plaintiff to reimburse Halsey for expenses of $30,000. The plaintiff has appealed the decision, and Halsey’s counsel is unable to predict the outcome of the appeal. In its December 31, 20X2, balance sheet, Halsey should report what amounts of asset and liability related to these legal actions?
Asset: $30,000; Liability: $0
Asset: $30,000; Liability: $50,000
Asset: $0; Liability: $0
Asset: $0; Liability: $20,000
Question #300774
Asset: $0; Liability: $0
FASB ASC 450-20-25-2 provides for:
accrual of a loss if such loss is probable and can be reasonably estimated, and
no accrual of gains.
FASB ASC 450-20-55-12 indicates: “If the underlying cause of the litigation, claim, or assessment is an event occurring before the date of an enterprise’s financial statements, the probability of an outcome unfavorable to the enterprise must be assessed to determine whether the condition in paragraph 8(a) is met. Among the factors that should be considered are the nature of the litigation, claim, or assessment, the progress of the case (including progress after the date of the financial statements but before those statements are issued or are available to be issued, with the appropriate date determined in accordance with Statement 165), the opinions or views of legal counsel and other advisers, the experience of the enterprise in similar cases, the experience of other enterprises, and any decision of the enterprise’s management as to how the enterprise intends to respond to the lawsuit, claim, or assessment (for example, a decision to contest the case vigorously or a decision to seek an out-of-court settlement).”
Since the outcome of the appeal cannot be predicted, no asset (gain) should be reported. Since Halsey received a favorable judgment, the liability accrued in 20X1 is no longer appropriate. (And the legal costs have probably already been expensed.) However, the lawsuit and appeal should be disclosed in a footnote.
FASB ASC 450-20-25-2
FASB ASC 450-20-25-2 provides for:
- accrual of a loss if such loss is probable and can be reasonably estimated, and
- no accrual of gains.
FASB ASC 450-20-55-12
FASB ASC 450-20-55-12 indicates: “If the underlying cause of the litigation, claim, or assessment is an event occurring before the date of an enterprise’s financial statements, the probability of an outcome unfavorable to the enterprise must be assessed to determine whether the condition in paragraph 8(a) is met. Among the factors that should be considered are the nature of the litigation, claim, or assessment, the progress of the case (including progress after the date of the financial statements but before those statements are issued or are available to be issued, with the appropriate date determined in accordance with Statement 165), the opinions or views of legal counsel and other advisers, the experience of the enterprise in similar cases, the experience of other enterprises, and any decision of the enterprise’s management as to how the enterprise intends to respond to the lawsuit, claim, or assessment (for example, a decision to contest the case vigorously or a decision to seek an out-of-court settlement).”
Contingency
A contingency is an event or condition that may occur in the future but that cannot currently be predicted. It has an uncertain outcome. The outcome of that event will change an existing condition or resolve a current uncertainty.
Contingency
A contingency is classified in one of the following three ways:
Probable—likely to happen
Reasonably possible—may happen, but neither likely nor remote
Remote—not apt to occur
Contingency
FASB ASC 450-30-25-1
FASB ASC 450-30-25-1 applies conservatism to a contingency (losses recognized now and gains when realized). The standard requires that a loss contingency that is probable and whose amount can be reasonably estimated be accrued by debiting an expense and crediting a liability or a contra asset, as well as disclosing the uncertainty in the notes to the financial statements. If the loss contingency cannot be estimated but is reasonably possible, it must be disclosed in the notes to the financial statements. If the loss contingency is remote, then the auditor should document the rationale for this decision and no adjustment or disclosure is required.
A gain contingency, on the other hand, is not recorded until the event occurs that establishes the gain.
Contingent Liability
Contingent Liability
A contingent liability is the result of a past condition or event that will be resolved by an event or transaction in the future. The liability is recorded because a contingency is deemed to be probable—likely to happen—and its amount can be reasonably estimated. The liability arises because the expense or loss needs to be accounted for in the current period.
Contingent Liability
A contingent liability can sometimes be appropriately referred to as an unidentified liability because the amount is not reasonably estimable or the obligee’s identity is not yet certain.
Contingent Liability
Such a “potential (reasonably possible)” liability must be reported, indicating there is no reasonable estimate of cost, but only in a footnote disclosure to the financial statements, not in the body of the statements.
Probable
If an event is probable, the future event or events are likely to occur.
FASB ASC Glossary
2321.07
Gain contingencies
Gain contingencies are usually not reflected in the accounts, since to do so would be to recognize revenue prior to its realization. Adequate disclosure is made of gain contingencies but care must be taken to avoid misleading implications.
2321 Contingencies -1
2321 Contingencies - 2
2321 Contingencies - 3
