Accounting for Contingencies (Portfolio 5165)

BNA Tax and Accounting Portfolio 5165, Accounting for Contingencies, examines accounting for contingencies under both U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). 

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This Portfolio is part of the Accounting Policy and Practice Series, an essential resource including more than 70 accounting Portfolios and the latest news and developments.



BNA Tax and Accounting Portfolio 5165, Accounting for Contingencies, examines accounting for contingencies under both U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). The Portfolio also distinguishes contingencies from other similar items not properly accounted for as contingencies. The Portfolio's subject matter commands widespread interest given the litigious nature of the business world and the need for entities to disclose significant risks to their future operations, cash flows, and net worth.
Accounting for contingencies includes reporting of potential losses from litigation in process, environmental damage, and expenses related to uncollectible accounts receivable and product warranty costs. The primary source accounting rules for contingencies under U.S. GAAP is FASB Statement No. 5, Accounting for Contingencies (FAS 5), which is principally codified in FASB Accounting Standards Codification Topic 450 (ASC) . Its principal international counterpart is IASC International Accounting Standard 37, Provisions, Contingent Liabilities and Contingent Assets (IAS 37). Guarantees made by guarantors are special types of contingencies subject to their own set of rules in addition to those provided in the codified rules from FAS 5. Readers of this Portfolio will gain an understanding of reporting requirements for contingencies, as well as how this reporting is executed in the contemporary business setting.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5165, Massey, Mazza, Schiff, Schiff and Van Hise, Accounting For Contingencies (Accounting Policy and Practice Series).

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Dr. Dawn W. Massey, CPA is a Professor of Accounting at the Charles F. Dolan School of Business at Fairfield University. She has published numerous articles in the areas of accounting ethics and pedagogy. Dr. Massey was co-recipient (along with Dr. Joan Van Hise) of the 2001 American Accounting Association Innovation in Accounting Education Award.

Dr. Cheri B. Mazza, CPA, CMA is a consultant. Her research focuses on contemporary financial reporting, standard setting, and quality of earnings. Formerly, Dr. Mazza was a project manager at the Financial Accounting Standards Board (FASB).

Dr. Allen I. Schiff is Area Chairman of Accounting at the Schools of Business at Fordham University and the Director of Fordham's MBA Field Study Consulting Program. His articles have appeared in numerous publications. Previously, Dr. Schiff served as a Faculty Fellow at PricewaterhouseCoopers.

Dr. Jonathan B. Schiff is a Professor of Accounting at the Silberman School of Business of Fairleigh Dickinson University. He has extensive consulting experience with top companies including American Express, Johnson & Johnson, and Microsoft. Dr. Schiff has published numerous articles in the areas of corporate financial reporting, internal control, CFO leadership development practices, and cost management.

Dr. Joan Van Hise, CPA is Chair of the Accounting Department at the Charles F. Dolan School of Business at Fairfield University. Her research focuses on accounting ethics and pedagogy. In 2008, Dr. Van Hise was named the Alpha Sigma Nu Teacher of the Year at Fairfield University.


Detailed Analysis

I. Scope and Purpose of Portfolio

II. Background of Accounting Pronouncements

Introductory Material

A. Development of Standards

1. U.S. Generally Accepted Accounting Principles

2. International Financial Reporting Standards

B. Governing Authoritative Guidance

1. U.S. Generally Accepted Accounting Principles

2. International Financial Reporting Standards

III. Gain Contingencies

IV. Loss Contingencies

Introductory Material

A. Definitions

1. Loss Contingency Defined

2. Contingencies Distinguished From Estimates

B. Applicable Range of Likelihoods

C. Accrual and Recognition of Loss Contingencies

D. Disclosure of Loss Contingencies Existing at the Date of the Financial Statements

E. Additional Disclosure of Near Term Uncertainties

1. Requirement

2. Example

F. Disclosure of Losses and Loss Contingencies Occurring in the Subsequent-Events Period

G. General or Unspecified Business Risks

H. Exclusions From Scope of the Codified FAS 5 Rules

I. Appropriation of Retained Earnings

1. Relevance to Contingencies

V. Contingencies in Business Combinations

Introductory Material

A. Contingent Consideration

B. Contingent Gains and Losses

VI. Guarantees Including Product Warranties

A. Description

B. Disclosure of Guarantees

C. Situations in Which a Guarantor Must Recognize and Measure a Liability for a Guarantee

1. Initial Recognition and Measurement of the Liability for a Guarantor's Obligations

a. Contributions of Guarantees to Unrelated Parties

b. Entries Offsetting Liability Accounts

2. Subsequent Measurement of Guarantor's Obligation

D. Situations in Which Guarantor Must Disclose a Guarantee

E. Scope of the Codified FIN 45 Rules

1. Guarantees Subject to All Provisions of the Codified FIN 45 Rules

2. Guarantees Excluded From the Entire Scope of The Codified FIN 45

3. Guarantees Subject Only to FIN 45 Disclosure Requirements

VII. Contingencies

Introductory Material

A. Litigation, Claims, and Assessments

1. Pending Litigation

2. Potential Litigation

B. Product Warranties

1. Warranties Not Stated Separately

2. Warranties Priced and Sold Separately

C. Product Defects

D. Environmental Liabilities

E. Collectibility of Receivables

1. Trade Accounts Receivable

2. Impairment of a Loan

F. Threat of Expropriation of Assets

G. Risk of Loss Resulting From the Absence of Insurance or Inadequate Insurance

H. Other Loss Contingencies

1. Risk of Loss From Future Injury to Others, Damage to the Property of Others and Business Interruption

2. Catastrophe Losses of Property and Casualty Insurance Companies

3. Payments to Insurance Companies That May Not Involve Transfer of Risk

VIII. Provisions, Contingent Liabilities, and Contingent Assets under International Accounting Standard (IAS) 37

Introductory Material

A. Scope of International Rules

1. Items Within the Scope of IAS 37

2. Items Beyond Scope of IAS 37

B. Accounting for Provisions

1. Measurement of Provisions

2. Disclosure of Provisions

3. Exemption for Disclosure of Provisions

C. Accounting for Contingent Liabilities

D. Accounting for Contingent Assets

IX. Examples of Assessing, Recognizing, and Disclosing Contingencies Under IAS 37

Introductory Material

A. Perspective on Examples

B. Provisions

1. Warranty Liabilities

2. Environmental Liabilities

3. Self-Insurance

4. Litigation

C. Contingencies

1. Loss Contingencies Related to Litigation

2. Gain Contingencies

X Possible Expanded Disclosure Requirements for Loss Contingencies

Introductory Material

A. Proposed Increased Disclosures

B. Constituent Reactions to Exposure Draft

C. FASB Project Status

XI. Auditing Considerations

Introductory Material

A. Key Issues

1. Auditing Gain Contingencies

2. Auditing Loss Contingencies

a. Discovering Loss Contingencies

i. Client Resistance

ii. Need for Multiple Audit Procedures

b. Reporting Loss Contingencies

B. Audit Procedures

1. Discovering Contingencies

a. Interviews

b. Reviews of Minutes of Meetings of the Board of Directors

c. Reviews of Legal Invoices

d. Reviews of Bank Confirmations

e. Reviews of Company Agreements

f. Reviews of Company Procedures

2. Reporting Contingencies

a. Whether to Report a Contingency

i. Gain Contingencies

ii. Loss Contingencies

b. The Amount at Which to Report a Contingency


Working Papers


Worksheet 1 Glossary

Worksheet 2 Footnote Disclosure - Loss Contingency Related to a Condition Existing at the Balance Sheet Date When Additional Information is Received Between the Balance Sheet Date and the Date When the Financial Statements are Released (Type I Subsequent Event): Tgfin Holdings, Inc. (Quarter ended 3/31/05)

Worksheet 3 Footnote Disclosure - Loss Contingency Related to Condition that Did Not Exist at the Balance Sheet Date but Occurred Before Release of the Financial Statements (Type II Subsequent Event): Safeco Corp. (Year ended 12/31/2000)

Worksheet 4 Footnote Disclosure - Guarantor's Disclosure of Warranty Liabilities: NRG Energy, Inc. (Year ended 12/31/05)

Worksheet 5 Footnote Disclosure - Guarantor's Disclosure of Warranties: International Game Technology (Year ended 9/30/07)

Worksheet 6 Footnote Disclosure-Litigation: Altria Group's Philip Morris, Incorporated (Years ended 12/31/93, 94, 00, and 07)

Worksheet 7 Footnote Disclosure - Product Defects: Sony Corp. (Years ended 3/31/06 and 3/31/07)

Worksheet 8 Footnote Disclosure - Environmental Liabilities: General Electric Co. (Year ended 12/31/07)

Worksheet 9 Footnote Disclosure - Loan Impairment IndyMac Bancorp, Inc. (Year ended 12/31/07)

Worksheet 10 Footnote Disclosure - (Threat of) Expropriation of Assets: ExxonMobil Corporation, Inc. (Years ended 12/31/06 and 07)

Worksheet 11 Memo Report - AICPA Committee on Insurance and Auditing (Issued 7/17/73)

Worksheet 12 Accrual and Footnote Disclosure - Provision for Warranty Liabilities

Worksheet 13 Accrual and Footnote Disclosure - Provision for Environmental Liabilities

Worksheet 14 Accrual and Footnote Disclosure - Provision for Self-Insurance: CRH, plc (Year ended 12/31/07)

Worksheet 15 Accrual with Exemption Claimed for Disclosure of Seriously Prejudicial Information Applicable to Litigation: British Airways (Year Ended 03/31/08)

Worksheet 16 Footnote Disclosure - Contingent Liabilities and Legal Proceedings: Royal Dutch Shell (Year ended 12/31/07)

Worksheet 17 Footnote Disclosure - Product Liability Litigation:British-American Tobacco (Year Ended 12/31/07)

Worksheet 18 Footnote Disclosure - Securities Litigation:Vivendi, Inc. (Year ended 12/31/07)

Worksheet 19 Footnote Disclosure - Contingent Gain: LVMH Group (Half-year ended 06/30/08)

Worksheet 20 Accrual & Footnote Disclosure - Provision for Loss and Disclosure of Corresponding Contingent Gain related to Workers Compensation Claims: BlueScope Steel Limited (For the Year Ended June 30, 2007



Securities and Exchange Commission (SEC):

SEC Releases

Financial Accounting Standards Board (FASB):

FASB Accounting Standards Codification:

FASB Statements of Financial Accounting Standards

FASB Concepts Statements

FASB Interpretations

FASB Staff Positions

FASB Technical Bulletins

FASB Proposed Statements of Financial Accounting Standards

American Institute of Certified Public Accountants (AICPA)

Accounting Research Bulletins

AICPA Statements of Position

International Accounting Standards

International Standards Committee Publications

Standing Interpretations Committee Interpretations

International Accounting Standards Board's International Financial Reporting Interpretations Committee (IFRIC)


Periodicals, Articles and Books

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