Examples of contingent liabilities
Warranties (autos, appliances, electronics)Premiums (coupons, free gifts)Rebates (money back)
Regular warranty is part of the...
product cost - it is the assurance that the product will function properly
Extended warranty is a...
separate cost to the customer and a distinct performance obligation (revenue)
What is the accounting and disclosure of an unasserted claim that is probable to occur?
If an unasserted claim is probable to occur, it must be disclosed and an estimated liability accrued
Unasserted Claims and Assessments
Entities may be subject to future claims and assessments not yet filed as of the balance sheet date
Contingencies Acquired in Business Combinations-If the contingency is contractual (e.g., a regular warranty) at acquisition, then...
contingent liability is recognized by the acquirer at fair value
Contingencies Acquired in Business Combinations-At acquisition, if the contingency is not contractual and has more than a 50% probability of becoming a definite liability when a future event occurs or does not occur, then...
the liability is recognized at fair value; otherwise, there is no recognition
Contingencies Acquired in Business Combinations-After acquisition, as new information is obtained,...
the contingency is reported at the greater of acquisition date fair value, and the amount that would be recognized under normal contingency rulesany changes in the reported liability are recognized as gains or losses
Describe the accounting treatment when a gain contingency is probable
Disclose in a footnoteProbable and estimable gain contingencies, in contrast with loss contingencies, are not recognized in the accountsConservatism dictates that the future event must first occur before recognizing the gain and asset increase (or liability decrease)
Describe the accounting treatment when a gain contingency is possible
Disclose in a footnote
GuaranteesEntities may guarantee the debt of an affiliate to help the affiliate obtain a loan or a line of credit. The guarantor must be ready to comply with the guarantee if the triggering event occurs (e.g., default by the debtor whose debt is guaranteed by the guarantor).The guarantor is required to disclose the following:
The nature of the guarantee, the term of the guarantee, how the guarantee came into existence, and the triggering eventThe maximum future amount payable under the guaranteeThe carrying amount of the liabilityA description of recourse provisions or available collateral enabling the guarantor to recover the amounts paid under the guarantee, if any
GuaranteesIf it is probable that the triggering event will occur and the guarantor will be required to pay under the terms of the guarantee, then...
the guarantor must accrue a liability associated with the guarantee
If, at the balance sheet date, it is not probable that a claim or assessment will occur or if the outcome is not expected to be unfavorable to the entity, then...
no recognition or disclosure is required
If it is probable that a claim or assessment will occur, and there is at least a reasonable probability that the outcome will be unfavorable to the entity, then...
the claim or assessment is treated as a contingency, even though no claim or assessment has been filed
The event before the balance sheet that would trigger the claim or assessment (such as a previous year's tax return filing or environmental violation) must have occurred, before the entity recognizes or discloses the contingencyWhat is recognized and footnoted?
If the amount is estimable, the contingent liability is recognizedOtherwise, it is footnoted only
Lawsuits (or other legal action)
Accrue and disclose when loss is probable and estimableDisclose when loss is possible (no accrual)No disclosure or accrual when loss is remote
Product warranties, rebates, and premiums
Accrue an estimated liability based on historical payments and disclose information regarding the liability
Financial guarantees of another entity's indebtedness
Disclose information regarding the guaranteeAccrue a liability associated with the guarantee only when the payment associated with the guarantee is probable