Question

1.What are contingencies? How are contingencies reported in the financial statements?

Answer 1

Contingency refers to a situation where usually the outcome or result turns out to be uncertain which cannot be accurately predicted and is being resolved which may cause loss in the future.

These losses being reported are generally of probable nature and the amount for the loss can also be predicted.

When it comes to accounting and reporting of contingencies in the financial statements, only those losses are being recorded which are actully probable and for which amount can be estimated.

If it is being observed that estimated amount of the loss is falling within a range, then the best estimate from that range is being selected for reporting that particular loss. But if there in the range, no any better estimate is found, then from the range amount with minimum loss is being reported.

One more condition arise that is if it becomes impossible to estimate any amount from the range to be reported as loss, then in that case, a note is being disclosed with the financial statements which would contain the existence of contingencies.

In case, it appears that a loss is not probable to occur, but the loss amount can be estimated, it is also disclosed in the note with circumstances without accruing the amount of loss.

If the conditions for amount of loss being recorded is recognised in the later accounting period, then accordingly loss should be incurred in later period only. No adjustments are to be made in the prior period before loss is being recognised.

These are the ways how repoorting for contingencies are done in financial statements.