The Financial Accounting Standard Board Statement No. 5, Accounting for Contingencies, states a contingency as an existing condition, situation, or circumstances, in which the company can gain or loss when one or more future events occur or not occur. The FASB Statement No. 5 defines two types of contingencies—gain contingencies and loss contingencies. The company requires determination of the likelihood of loss to recording loss contingencies.
1. Probable. The future event is likely to occur
2. Reasonably possible. The chance of future events’ occurrence is more than remote but less than probable.
3. Remote. The chance of future events’ occurrence is small.
When the company recognizes the likelihood of a loss, contingencies are charged against income and a liability is recorded if conditions are met.
1. Information available prior to the issuance of the financial statements states that the company probable impairs an asset or incurs a liability at the date of the financial statements.
2. The company can estimate the amount of the loss.
The FASB Statement No. 5 also shows that the company recognizes the loss contingencies as liabilities in a financial statement. The disclosure shows the loss contingency and states the estimate of loss. Before the company issues the financial statement and after the enterprise’s financial statement is done, the company can impair an asset or incur the liability. Disclosure of loss contingencies helps the company to keep its financial statements not being misleading. When the disclosure is necessary, the company must report the loss contingency in financial statements with a given estimate of the mount of loss.
Financial Accounting Standards Board (2010).Statement of Financial Accounting Standards No. 5: Accounting for Contingencies. Retrieved June 16, 2010. Retrieved from...