Question

A recently issued demographic report indicates that there is a reasonable probability that Lambert's business may be adversely impacted in the future. The company's controller wants to begin accruing a general contingency reserve now for unspecified business contingencies, such as the potential decline in business that may occur in the future. Find authoritative guidance as to whether or not such an accrual is allowed under GAAP.

Answer 1

The company's controller wants to begin accruing a general contingency reserve now for unspecified business contingencies, such as the potential decline in business that may occur in the future

Statement establishes standards of financial accounting and reporting for loss contingencies(. FASB’s statement no. 5 ) It requires accrual by a charge to income (and disclosure) for an estimated loss from a loss contingency if two conditions are met:

(a) information available prior to 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

(b) the amount of loss can be reasonably estimated. Accruals for general or unspecified business risks ("reserves for general contingencies") are no longer permitted.

Accounting for gain contingencies under Accounting Research Bulletin No. 50, Contingencies, remains unchanged; they are recognized when realized.

Thus, assuming that the amount of decline in Lambert’s business can be reasonably estimated in this case, accrual will be allowed under GAAP.

Disclosure shall include estimate of the possible loss or range of loss and also a statement regarding the nature of the contingency as the statement of FASB ASC 450-20-50-5

So, the correctly formatted FASB ASC topic is: FASB ASC 450-20-50-5