Contingent Liabilities

Question 1

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?

Answer 1

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

Question 2

Rule for all liabilities?

Answer 2

All liabilities result from past events, even contingent liabilities

Question 3

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?

Answer 3

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)

Question 4

What disclosures are required for warranties?

Answer 4

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)

Question 5

What is required when a loss contingency is remote?

Answer 5

May but are not required to disclose

Question 6

Do you adjust accrued warranty liabilities when the warranty period expires without all of the claims being filed?

Answer 6

No - you only adjust the accrual for the actual amount of the claims. No reversals at the end of the warranty period.

Question 7

If a gain is probable, what should you do?

Answer 7

Disclose it

You would also disclose a possible gain that is not probable but could materially affect the statements

Question 8

When a contingent liability is accrued, is disclosure still required?

Answer 8

yes

Question 9

Are the following contingent or definite liabilities?
Gift cards
Unearned revenue
Frequent flier
Warranties established through a contract
Compensated absences
Guarantee of a subsidiary note payable

Answer 9

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

Question 10

How does self-insurance affect accrual of a loss on lawsuit?

Answer 10

Ignore it - only impact is that loss won’t be limited by insurance deductible

Question 11

Company A guarantees Company B debt. The likelihood that Co A will pay anything is remote. Should it be disclosed?

Answer 11

Yes, still disclose it