Question

• Discuss the two main distinctions between assets on the balance sheet.
• Discuss reporting requirements for contingencies.
• Explain two examples of contingent liabilities

Answer 1

Solution 1) Following are the two main distinctions between assets on the Balance Sheets:

a) Non Current Assets: A non current asset is an asset that is not expected to be consumed within one year. A non current asset is recorded as an asset when incurred, rather than being charged to expense at once. Depreciation, depletion, or amortization may be used to gradually reduce the amount of a non current asset on the balance sheet.

Examples of noncurrent assets are:

• Long-term investments
• Intangible fixed assets (such as patents)
• Tangible fixed assets (such as equipment and real estate)
• Goodwill

b) Current Assets:  Current assets represent the value of all assets that can be converted to cash and are used to fund the ongoing operations of the company and pay current expenses.

Current assets include:

• Cash and cash equivalents
• Accounts receivable
• Prepaid expenses
• Inventory
• Marketable securities

Solution 2) Reporting requirements for contingencies:

Accounting for Contingencies requires the recognition of a loss contingency if

1. the loss is deemed to be probable, and
2. the amount of loss can be reasonably estimated.

When both of these criteria are met, the expected impact of the loss contingency is recorded.

FASB identifies a number of examples of loss contingencies that are evaluated and reported in this same manner including:

• Collectability of receivables
• Obligations related to product warranties and product defects
• Risk of loss or damage of enterprise property by fire, explosion, or other hazards
• Threat of expropriation of assets
• Pending or threatened litigation
• Actual or possible claims and assessments
• Guarantees of indebtedness of others

A potential or contingent liability that is both probable and the amount can be estimated is recorded as 1) an expense or loss on the income statement, and 2) a liability on the balance sheet.

A loss contingency which is possible but not probable will not be recorded in the accounts as a liability and a loss. Rather, it will be disclosed in the notes to the financial statements.

Solution 3) Following are the two examples of Contingent liabilities:

The two examples of contingent liabilities include a company warranty and a lawsuit against the company. Both represent possible losses to the company, yet both depend on some uncertain future event.