I would like to record about the key points of the US CPA exam content.
<Create and note the points based on mainly Becker’s workbook>
Criteria for Recognizing loss
- the following two conditions must be met: Likelihood of Occurrence (The occurrence of the loss is considered “probable“) and Amount of Loss (the amount of the loss can be reasonably estimated)
- If these conditions are not met, the possibility of the loss should only be disclosed, but not actually recognized in the financial statements.
- When there is a best estimate: Recognize the amount that is most likely.
- When all amounts are equally likely: Recognize the minimum amount within the range.
- Only footnote disclosure is required for a “reasonably possible” loss. The disclosure should include the range and indicate that the best estimate.
Classification of Likelihood
- Probable: The occurrence of the loss is estimated to be very likely. In this case, the loss is recognized and disclosed.
- Reasonably passible: The occurrence of the loss might happen, but it is not as certain as probable. In this case, the loss is disclosed but not recognized.
- Remote: The occurrence of the loss is estimated to be very unlikely. In this case, the loss is neither disclosed nor recognized. Loan guarantee Although the chance that the guarantee’s default will be unlikely and the contingency is considered remote, this is one type of remote contingency that must be disclosed in the financial statements (debts of others guaranteed).
Onerous Contracts vs Loss Contingencies
- Scope and Definition: Onerous Contracts / Focuses on losses arising from specific contracts where the costs of fulfilling the contract exceed the benefits. Loss Contingencies /Encompasses potential future losses arising from past events, applicable in broader situations such as lawsuits and warranties.
- Recognition Criteria: Onerous Contracts / Loss is recognized when it is certain that the costs exceed the benefits of the contract. Loss Contingencies / Loss is recognized when it is probable that a loss will occur, and the amount can be reasonably estimated.
- Recognition Timing: Onerous Contracts: Recognized immediately when it is determined that the costs exceed the benefits. Loss Contingencies: Recognized when the occurrence of the loss is probable, and the amount can be reasonably estimated.
- A contingent liability that is probable but cannot be reasonably estimated should be disclosed in the financial statements but not recorded as an adjustment in the financial statements. If a reasonable range of the loss cannot be estimated, then a statement saying such must be included in the notes.
- A loss contingency involves a possible future loss whose existence is proven by subsequent events. Pending or threatened litigation is an example of a loss contingency, as litigation could result in an obligation and subsequent outflow of resources if the lawsuit is settled and payment is required.
- Contingent liabilities are recorded when they are probable and estimable. Although GAAP requires accrual of the best estimate, in the event that only a range of liabilities is known, the minimum amount of the range is recorded.
Gain contingencies
- Gain contingencies should be disclosed in the notes unless the likelihood of the gain being realized is remote. The full range of possible settlements should be disclosed. The actual settlement did not occur until after the financial statements were issued.
- Gain contingencies are not accrued until the transaction generating the gain is completed. Gain contingencies should be disclosed, unless the likelihood of realization is remote.
a example of Premium expense
- Therefore, 80,000 coupon redemptions are expected in the future (150,000 in total – 70,000 already redeemed = 80,000).
- 80,000 expected coupon redemptions / 4 coupons needed per premium = 20,000 premiums.
- At a cost of $14 per premium, the total expected cost is equal to 20,000 × $14 = $280,000.
adjusting subsequent event
- A contingent liability is not accrued for reasonably possible loss contingencies. If the suit had been settled before the financial statements were issued, then a liability would have been recorded on the December 31, Year 1 balance sheet.
