Contingent Liabilities 
Tim Kohlhaas
12/8/14
ACC322
This particular financial accounting standards statement sets up the foundation for reporting and accounting for loss contingencies. A contingent liability is a potential liability that might, or might not happen in the future. For example this could be a lawsuit, a product warranty, a possible tax assessment, a government investigation, or even an environmental contamination. A contingent liability and the associated loss are recorded as a journal entry only if the contingency meets these two criteria; A.) the contingency is probable, and B.) the amount can be reasonably estimated. Although if the contingency only satisfies one of those requirements, the liability is “possible”, but not “probable”, or if the liability cannot be reasonably estimated, then, instead of a journal entry, a footnote discloses that information. If the event is a very remote isolated liability, then no disclosure is needed in the financial statement. “In order to record a liability, the cause of the uncertainty must exist at the balance sheet date. Therefore, no liability will exist for obligations that do not currently exist but, instead represent potential future liabilities from exposure to general business risk.” (Whalen). Contingent liabilities differ from other future business risks because unlike contingent liabilities, no specific accounting is made in advance of those risks. On the balance sheet, a loss is recorded (debit) and a credit to a liability account. A few differences occur regarding contingency reporting under IFRS vs. GAAP. The recorded amounts under US GAAP standards require the low end of the range of estimates to comply with the conservatism principal. Under international law, the midpoint of the estimates is recorded on the balance sheet. Basic terminology, recognition, and measurement recording are the main differences in the two reporting standards. The purpose of recording these contingent liabilities is to give an advanced
12/8/14
ACC322
This particular financial accounting standards statement sets up the foundation for reporting and accounting for loss contingencies. A contingent liability is a potential liability that might, or might not happen in the future. For example this could be a lawsuit, a product warranty, a possible tax assessment, a government investigation, or even an environmental contamination. A contingent liability and the associated loss are recorded as a journal entry only if the contingency meets these two criteria; A.) the contingency is probable, and B.) the amount can be reasonably estimated. Although if the contingency only satisfies one of those requirements, the liability is “possible”, but not “probable”, or if the liability cannot be reasonably estimated, then, instead of a journal entry, a footnote discloses that information. If the event is a very remote isolated liability, then no disclosure is needed in the financial statement. “In order to record a liability, the cause of the uncertainty must exist at the balance sheet date. Therefore, no liability will exist for obligations that do not currently exist but, instead represent potential future liabilities from exposure to general business risk.” (Whalen). Contingent liabilities differ from other future business risks because unlike contingent liabilities, no specific accounting is made in advance of those risks. On the balance sheet, a loss is recorded (debit) and a credit to a liability account. A few differences occur regarding contingency reporting under IFRS vs. GAAP. The recorded amounts under US GAAP standards require the low end of the range of estimates to comply with the conservatism principal. Under international law, the midpoint of the estimates is recorded on the balance sheet. Basic terminology, recognition, and measurement recording are the main differences in the two reporting standards. The purpose of recording these contingent liabilities is to give an advanced