Question

1. Cite and explain when a contingent loss should be shown on the financial statements.

2. Cite and explain the criteria to determine if an employer must accrue a liability for vacation pay.

3. Cite and explain GAAP’s statement about gain contingencies (should they be shown on the

financial statements and/or should they be disclosed in the notes to the financial statements).

4. Cite and explain the guidelines for reporting Other Comprehensive Income in shareholders’

equity.

5. Cite and explain the disclosure requirements for contingently convertible securities.

Answer 1

1. Contingent loss is a liability that is likely to arise in the future as a result of an uncertain process. Accidental loss is recorded if contingency is possible and the amount of loss can be reasonably estimated. As long as both conditions are not met, the liability may be stated in the financial statements.

Liability based on the outcome of an uncertain process requires two actions to be taken before a report can be made in a financial statement. First, it is possible to estimate the value of contingent liability. If it is possible to estimate the value, the probability of realizing the loss needs to be more than 50%. The amount of eligible contingency loss is required to be recorded in the income statement as an expense and in the balance sheet as a liability.