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Contingent Liabilities - YouTube
Channel: Learn Accounting with Iana Zemniakova, CPA
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hello and welcome to financial
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accounting our topic today is contingent
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liabilities
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we will look at the accounting treatment
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of contingent liabilities
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and how it depends on the likelihood of
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occurrence and its measurement
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we will also look at several examples
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some liabilities might arise from past
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transactions if certain events occur in
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the future
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these potential liabilities are called
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contingent liabilities
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the accounting for contingent
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liabilities depends on two factors the
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likelihood of the future event occurring
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and its measurement
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the first step in evaluating contingent
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liabilities
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involves determining the likelihood of
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the future event occurring
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the likelihood may be probable
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reasonably possible or remote
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the next step is measurement
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in case the likelihood is probable the
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accounting treatment depends on whether
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the liability is estimable or not
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if the likelihood is probable and the
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amount can be estimated the liability
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must be reported and disclosed
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an example of this would be the
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liability for warranty repairs
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in cases where a contingent liability is
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probable and its amount is not estimable
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the accounting treatment is to disclose
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the liability in the notes to the
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financial statements
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for example a company may have
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accidentally polluted a local river by
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dumping waste products
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at the end of the period the cost of the
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cleanup and any fines may not be able to
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be estimated
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a contingent liability may only
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reasonably be possible
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in this case the contingent liability is
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also disclosed in the notes to the
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financial statements
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no disclosure is required in the notes
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to the financial statements when
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contingent liability is remote
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let's look at a couple of examples of a
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contingency that is probable and
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estimable
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delta corporation owns a property on
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which chemicals had been stored in the
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past
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the local zoning commission has notified
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delta corporation that it must remediate
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the property
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delta corporation hired a consulting
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company to estimate the cost of
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remediation
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the cost has been documented at 250
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million dollars delta corporation must
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record the 250 million as a contingent
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loss and disclose the details in the
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notes to the financial statements
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because the amount of the loss has been
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reasonably estimated
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and it is probable that the loss will
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occur
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what if the zoning commission had not
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indicated the liability
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in this case
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it may have been more appropriate for
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delta corporation to only mention the
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loss in the nodes to the financial
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statements
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in another example delta corporation
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received a notification that a third
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party may begin legal proceedings
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against it based on a situation
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concerning environmental damage to a
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site previously owed by delta
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corporation
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based on the experience of other
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companies who were subjected to this
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type of litigation it is probable that
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delta corporation will have to pay 80
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million dollars to settle the litigation
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a separate aspect of the litigation is
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still open to considerable
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interpretation
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it could potentially require an
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additional 120 million to settle
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in this situation delta cooperation
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should accrue a loss of 80 million
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dollars for the part of the situation
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for which the outcome is probable and
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for which the amount of the loss can be
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reasonably estimated
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i hope you found this video helpful if
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when we release more videos like this
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thank you all so much for watching and i
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hope to see you all again in the next
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video
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