Response_to_Client_Request_Ii

Response to Client Request II According to Schroeder, Clark, & Cathey (2011), a contingency is a possible future event that will have some impact on the firm (p. 369). The most frequently encountered contingencies are pending lawsuits, income tax disputes, notes receivable discounted, and accommodation endorsements. The FASB reviewed the nature of contingencies in SFAS No. 5, “Accounting for Contingencies.” In SFAS No. 5, there are two types of contingencies that are defined: gain contingencies and loss contingencies. According to Schroeder, Clark, & Cathey (2011), with respect to gain contingencies, the Board held that they should not usually be reflected currently in the financial statement because to do so might result in revenue recognition before realization (p. 370). Adequate disclosure should be made of all gain contingencies while exercising due care to avoid misleading implications as to the likelihood of realization (Schroeder, Clark, & Cathey, 2011, p. 370). According to Schroeder, Clark, & Cathey (2011), the criteria established for reporting loss contingencies require that the likelihood of loss be determined as follows: • Probable. The future event is likely to occur. • Reasonably possible. The chance of occurrence is more than remote but less than likely. • Remote. The chance of occurrence is slight. Once the likelihood of a loss is determined, contingencies are charged against income and a liability is recorded if both of the following conditions are met: 1. Information available before the issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and 2. The amount of the loss can be reasonably estimated (Schroeder, Clark, & Cathey, 2011, p. 370). According to Schroeder, Clark, & Cathey (2011), SFAS No. 5 provided evidence of the FASB’s preference for the conservatism convention because probable losses are recognized while probable gains are not. The provisions of SFAS No. 5 might cause one company to record a liability without a corresponding asset being recorded by the claimant company (p. 370). Even though two parties are affected by the same transaction or event, their respective financial statements would indicate otherwise. Reporting some types of contingencies may result in a self-fulfilling prophecy. A frequently encountered contingency problem is the question of including the possible loss from a lawsuit. According to Schroeder, Clark, & Cathey (2011), the dollar value of the loss can generally be estimated by applying the expected value criteria, but placing expected liability on the balance sheet may supply the plaintiff with additional evidence of the company’s guilt (p. 369). Here the corporation is faced with the dilemma of conflicting responsibilities to its financial statement users to disclose all pertinent information while at the same time minimizing losses. Reference Schroeder, R. G., Clark, M. W., Cathey, J. M. (2011). Financial accounting theory and analysis: Text readings and cases (10th ed.). Hoboken, NJ: Wiley.