Finally, how a loss contingency is measured varies between the two options as well. For example, if a company is told it will be probable that it will lose an active lawsuit, and the legal team gives a range of the dollar value of that loss, under IFRS, the discounted midpoint of that range would be accrued, and the range disclosed. Under US GAAP, the low end of the range would be accrued, and the range disclosed. Liquidity and solvency are measures of a company’s ability to pay debts as they come due.

According to the full disclosure principle, all significant, relevant facts related to the financial performance and fundamentals of a company should be disclosed in the financial statements. The measurement requirement refers to the company’s ability to reasonably estimate the amount of loss. Even though a reasonable estimate is the company’s best guess, it should not be a frivolous number.

FRC publishes thematic review findings on IAS 37

However, if the company is not found guilty, the company will not have any liability. Working through the vagaries of contingent accounting is a contingent liability that is probable and for which the dollar amount can be estimated should be sometimes challenging and inexact. Company management should consult experts or research prior accounting cases before making determinations.

The income statement and balance sheet are typically impacted by contingent liabilities. If a loss from a contingent liability is reasonably possible but not probable, it should be recorded as a disclosure in the footnotes to the financial statements. The company should record the nature of the contingent liability and give an estimate or range of estimates for the potential loss. A contingent liability should be recorded on the company’s books if the liability is probable and the amount can be reasonably estimated.

IAS 12 — Accounting for uncertainties in income taxes

These lawsuits have not yet been filed or are in the very early stages of the litigation process. Since there is a past precedent for lawsuits of this nature but no establishment of guilt or formal arrangement of damages or timeline, the likelihood of occurrence is reasonably possible. Since the outcome is possible, the contingent liability is disclosed in Sierra Sports’ financial statement notes. A loss contingency that is probable or possible but the amount cannot be estimated means the amount cannot be recorded in the company’s accounts or reported as liability on the balance sheet.

• Product warranties are often cited as a contingent liability that meets both of the required conditions (probable and the amount can be estimated).
• The company agrees to guarantee that the supplier’s bank loan will be repaid.
• Also, sales for 2020, 2021, 2022, and all subsequent years will need to reflect the same types of journal entries for their sales.
• Since this condition does not meet the requirement of likelihood, it should not be journalized or financially represented within the financial statements.
• According to the FASB, if there is a probable liability determination before the preparation of financial statements has occurred, there is a likelihood of occurrence, and the liability must be disclosed and recognized.