Describe what ‘loss contingencies’ are. Should Loss Contingencies should be accrued and reported on the ‘face’...

Describe what ‘loss contingencies’ are. Should Loss Contingencies should be accrued and reported on the ‘face’ of the financial statements? How are gain contingencies treated and reported? Why?

Expert Solution

The word 'Contingent' means an event may or may not happen in future. Contingent liabilities or Loss contingencies are those liabilities which may or may not happen in future depend on the happening of some specific event. Its is not an actual liability or loss for the company, but there is a chance of becoming liability.

Treatment of Contingent liability in balance sheet as follows:

1) It will NOT shown as a liability in balance sheet as its is not an actual or accured liability.

2) It will shown as a FOOT NOTE in the balance sheet ; According to Accounting Principle, Financial statement should disclose all material facts, so that the users of this information get a fair & true picture of the firm. So, contingent liabilities should mention below the balance sheet as a FOOTNOTE, so that user is able to know about the future uncertain liability of the firm.

Gain Contingenies are those events that may or may not happen but there is high possibility that after the occurance of that particular event, the companies will get some gain/ profit. For eg: A company is expected to win a case / legal disputes and in future if it happens , the company will get some benefit.

In Accounting principle, one of the convention called 'PRUDENCE / CONSERVATISM states that while recording business transactions, the companies should ANTICIPATE NO PROFITS but provide ALL POSSIBLE LOSSES. Until revenue is not recognised by the company , it will not shown in financial statements.

So, if actual gain happens, then it will shown on balance sheet;

ekkarill92 answered 2 years ago

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