Contingencies, Commitments, and Guarantees (Provisions)

Question 1

129. when is a contingent liability recognized in the f/s’s?

Answer 1

contingent liabilities are recognized only when they are probable and estimable.

Question 2

129. when is a contingent loss footnoted in the f/s’s?

Answer 2

When a loss is reasonably possible, it is footnoted

Question 3

129. what are the three levels (in order from most likely to least likely) that are used to classify the probability of an event happening

Answer 3

1) Probable
2) Reasonably possible
3) Remote

Question 4

129. When a loss is reasonably possible, how should it be shown in the f/s?

Answer 4

should be disclosed, but not recognized

Question 5

129. when a loss is probably but cannot be reasonably estimated, how should it be presented in the f/s?

Answer 5

should be disclosed

Question 6

129. when a loss is remote, how should it be presented in the f/s’s?

Answer 6

can be disclosed….but not required to be disclosed. for sake of CPA exam err on the side of conservatism and select “disclose” if asked.

Question 7

129. How are gain contingencies treated in financial reporting?

Answer 7

Gain contingencies are not recognized in the f/s’s. doing so may result in early recognition of revenue (violation of conservatism).

The underlying uncertainty must be settled before a gain can be recognized.

A contingent gain may be footnoted; however, the footnote should not make misleading statements about the likelihood of the realization of a contingent gain in the future.

Question 8

129. On the CPA exam, if you are given a range of possible contingent values, how should you handle this situation?

Answer 8

EXCEPTION: Usually you follow conservatism and use the highest possible value for a loss contingency. However, when you are given a range of possible values, you should use the lowest value in the range (which goes against conservatism)….unless one value in the range has a higher probability assigned, the value with the higher probability assigned is used for reporting.

See note below from study text…..

The range of possible values issue appears on the CPA Exam from time to time. The candidate must remember that conservatism plays an important role in recognizing contingent liabilities, but when only a range of possible values is known, an exception is made: The lowest rather than the highest amount is used for reporting purposes. If a range of values is 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.

Question 9

131. what is the threshold for IFRS v GAAP when it comes to accruing contingencies?

Answer 9

US GAAP = probable, which is interpreted as “likely to occur” = more than 70% probability of occurrence.

IFRS = “more likely, than not” = more than 50%

U.S. GAAP is a higher threshold for accrual

Question 10

131. what do the terms provision and contingent liability mean in IFRS world?

Answer 10

provision = recognized current obligation
contingent liab = unrecognized contingent obligation

note: GAAP refers to recognized and unrecognized contingent obligations as “contingent liabilities”

Question 11

131. when given a range of possible values for a contingent obligation, what amount should be used under IFRS

Answer 11

the midpoint of the range of values given