Accruals for Loss Contingencies Part I

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Oct26

Accruals for Loss Contingencies Part I

Linda Chan

October 26, 2006

Know More: Accounting fraud 2.0, Accounting fraud

The following is not meant to be legal or financial advice.

On October 13, 2006, Andrew Cotton presented to attorneys in Redwood City, CA on accruals and loss contingencies.

The three thresholds of assessing the likelihood of the occurrence of events that will confirm a loss are: (1) probable that a future event will likely occur, (2) reasonably possible that the chance of the future event occurring is more than remote, but less than likely, (3) remote that the chance of the future event is slight.

If it is both probable that a loss will result from a contingency and the amount of the loss can be reasonably estimated, the estimated loss is accrued by a charge to income.
Examples of loss contingencies include: warranties, collectability of receivables, pending litigation. The following factors are used in determining whether to accrue and disclose pending litigation: the date of the occurrence of the cause of action, the probability of an unfavorable outcome, the ability to reasonably estimate the amount of loss, the nature of the litigation, the opinions of legal counsel, the experience of the business in similar cases, the experience of other enterprises.

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Freddie Mac Nov 22, 2007
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Valuation Metrics Nov 1, 2006
Management’s Discussion and Analysis (MD & A) Part II Oct 28, 2006

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