Question

What will contigency note contain

Answer 1

Answer:

A contingency arises when there is a situation for which the outcome is uncertain, and which should be resolved in the future, possibly creating a loss. The accounting for a contingency is essentially to recognize only those losses that are probable and for which a loss amount can be reasonably estimated. Examples of contingent loss situations are:

Injuries that may be caused by a company’s products, such as when it is discovered that lead-based paint has been used on toys sold by the business

The threat of asset expropriation by a foreign government, where compensation will be less than the carrying amount of the assets that will probably be expropriated

A threatened lawsuit

When deciding upon the appropriate accounting for a contingency, the basic concept is that you should only record a loss that is probable, and for which the amount of the loss can be reasonably estimated. If the best estimate of the amount of the loss is within a range, accrue whichever amount appears to be a better estimate than the other estimates in the range. If there is no “better estimate” in the range, accrue a loss for the minimum amount in the range.

If it is not possible to arrive at a reasonable estimate of the loss associated with an event, only disclose the existence of the contingency in the notes accompanying the financial statements. Or, if it is not probable that a loss will be incurred, even if it is possible to estimate the amount of a loss, only disclose the circumstances of the contingency, without accruing a loss.

Explanation:

KEY TAKEAWAYS

A contingency is a potential negative event that may occur in the future, such as an economic recession, natural disaster, or fraudulent activity.Companies and investors plan for various contingencies through analysis and implementing protective measures.Contingency plans can include the purchase of options or insurance for investment portfolios.Banks must set aside a percentage of capital for negative contingencies, such as a recession, to protect the bank against losses.