Question

Case 13-08 Accounting for a Loss Contingency for a Verdict Overturned on Appeal

In the case, Accounting for a Loss Contingency, what were three possible alternative courses of action? Please explain

Answer 1

• If a specific event that can cause the gain occurs, and the gain is realized, then the gain is accrued for and reported in the financial statements. It is also disclosed in the notes section.
• Probable and quantifiable gains are not accrued for reporting purposes, but they can be disclosed in the notes to the financial statements if they are material. If the gain is not probable or reasonably estimated, but could materially effect financial statements, the gain is disclosed in a note.
• The materiality concept states that if a gain contingency, that remains unrealized, affects the economic decision of statement users, it should be disclosed in the notes.
• Following conservative constraints for a gain contingency, only a realized gain should be accrued for and disclosed on an income statement.