Question

In ASPE if the contingent loss (lawsuit) is reasonably measurable and likely to be incurred, the amount is accrued in the financial statements. If the amount is not measurable or is not likely to be incurred, then the potential loss is disclosed but not recorded. Also, if the probability of payment cannot be determined (is not estimable) the possibility of a loss is disclosed but not recorded.

For example, this policy can be directly applied to lawsuits. If a company is being sued by a disgruntled ex-customer, and the matter is before the courts, there can be a long delay in dispute resolution. A company will record a loss from the lawsuit prior to the court decision only if an amount, if any, of the court-ordered award can be predicted, and it appears likely that the company will lose the lawsuit or agree to a settlement. If an amount is not recorded, the existence of the lawsuit is explained in the disclosure notes.

 

Required:

1. List the recognition criteria.

2. Explain the accounting policy for contingent losses with reference to the recognition criteria in ASPE.

Answer 1

Requirement 1

 

The recognition criteria are:

 

1.            

The item meets the definition of a financial statement element.

 

2.            

The item has an appropriate basis of measurement and a reasonable estimate can be made of the amount.

 

3.           

For assets and liabilities, it is probable that economic benefits will be received or given up.

 

Requirement 2

 

The lawsuit accounting policy can be explained as follows:

 

1.            

The element in question is a potential liability, which may require the outflow of economic resources (cash) with no discretion to avoid payment (based on a court order), based on a past transaction with the ex-customer.

 

2.            

The element is only recorded if it can be measured or estimated, based on past legal precedent, the amount of the lawsuit, and/or the company’s willingness to offer a settlement.

 

3.           

The element is only recorded if it is likely that the outflow will happen, and the lawsuit will be lost or voluntarily settled.

 

Disclosure of the lawsuit satisfies the full disclosure requirement.

Disclosure of the lawsuit satisfies the full disclosure requirement.