Generally Accepted Accounting Principles
in the United States

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Accounting for Contingencies

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SFAS No. 5

Statement of Financial Accounting Standards (SFAS) No. 5
Accounting for Contingencies
        b.  Issued in March 1975
Deletes ARB No. 43, Chapter 6, "Contingency Reserves", June 1953
        d.  Supersedes ARB No. 50, "Contingencies", October 1958

Accrual of Loss Contingencies
        a.  Estimated loss from a loss contingency
                --> accrued by a charge to income
                --> if both of the following conditions are met

Conditions of Loss Contingencies Accrual
        a.  A loss contingency is probable.
        b.  Amount of loss can be reasonably estimated.
Likelihood of Loss Contingencies
        a.  Probable --> likely to occur
        b.  Reasonably possible --> more than remote but less than likely
        c.  Remote --> chance of occurring is slight.

Examples of Loss Contingencies
        a.  Collectibility of receivables
        b.  Product warranties
        c.  Risk of loss or damage of property
        d.  Pending litigation  

Gain Contingencies
        a.  Gain contingencies
                --> are not reflected in the accounts
                --> adequate disclosure shall be made
                --> avoid misleading implications as to the likelihood of realization.


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