F2 - 2.2 Contingencies

Question 1

How should the following be reported in the financial statements?

A subsequent event which occurs after the balance sheet date but before the financial statement issue date and the condition existed as on balance sheet date

Answer 1

Disclosure and an Accrual both are must

Question 2

How a loss contingency that is ‘Remote’ should be treated in Financial Statements?

Answer 2

No Disclosure, No Accrual

Question 3

How a loss contingency that is ‘Reasonably possible’ should be treated in Financial Statements?

Answer 3

Only Disclosure, No Accrual

Question 4

How a loss contingency that is ‘Probable but Non-estimable’ should be treated in Financial Statements?

Answer 4

Only Disclosure, No Accrual

Question 5

How a loss contingency that is ‘Probable and reasonably estimable’ should be treated in Financial Statements?

Answer 5

Accrued and Disclosed

Question 6

Under the US GAAP, how the contingent losses are classifed as ‘Remote’, ‘Probable’ and ‘Reasonably Possible’?

Answer 6

Remote – The chance of the future event or events occurring is slight

Probable – The future events or events are likely to occur

Reasonably possible – The chance is more than remote but less than likely

Question 7

What is the treatment of contingent losses in Financial Statements in following scenarios?

1. If there is a range of loss for a probable loss
2. In case multiple amounts are equally likely

Answer 7

1. If there is a range of loss for a probable loss, the most likely amount has to be accrued
2. In case multiple amounts are equally likely, then the minimum amount must be accrued and the range has to be disclosed.

Question 8

How is a ‘Gain Contingency’ is treated in Financial Statements?

Answer 8

Only Disclosure, No Accrual

Where chances are remote, No Disclosure No Accrual

In the case of gain contingencies, probable gain is disclosed. It is Accrued only when realized (per the conservatism principle). No gain is recognized in financial statements until realized.

Question 9

Summarise the treatment of Loss & Gain Contingencies

• Remote
• Reasonably Possible
• Probable but Non-estimable
• Probable & Reasonably Estimable

Answer 9

Summary Loss Contingency Gain Contingency
Disclose Accrue Disclose Accrue
Remote - No No No No
Reasonably possible - Yes No Yes No
Probable non-estimable - Yes No Yes No
Probable estimable - Yes Yes Yes No