Contingencies

ASPE: 3290

Contingencies

ASPE: 3290

Definition
  • A contingency is an existing condition or situation involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.
  • likely = the chance of the occurrence of the future event is high
  • unlikely = the chance of the occurrence of the future event is slight
  • not determinable = the chance of the occurrence of the future event cannot be determined
Accounting Treatment
Contingent losses
  • contingent losses are accrued in the financial statements when both are met:
    • The probability of loss is likely
    • The amount of the loss can be reasonably estimated
  • Contingent losses are disclosed in the notes to the financial statements when
    • The probability of loss is likely, but the amount cannot be reasonably estimated
    • The probability of loss is likely, and an accrual has been made but there is an exposure to loss in excess of the amount accrued
    • The probability of loss is not determinable
  • When the probability of loss is unlikely, you do not have to accrue or disclose
  • The disclosure should include:
    • The nature of the contingency; and
    • Estimate of the amount or a statement that an estimate cannot be made; and
    • Any exposure in excess of the amount accrued
Measuring of contingent loss
  • Measure contingent loss at the best estimate
  • When there is a range of possible estimates and when a particular amount in the range is a better estimate than any other, that amount is accrued
  • When there is a range, but no single amount is a better estimate, use the lowest amount in the range to measure the contingent loss
Contingent gains
  • Contingent gains are not accrued in the financial statements
  • A contingent gain that is likely to happen is to be disclosed
  • At a minimum disclose the following
    • The nature of the contingent gain; and
    • An estimate of the amount, or a statement that an estimate cannot be made
Comparison to IFRS
  • This topic is covered under IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
  • under IFRS, the term provision is used; instead the term contingent liability
  • under IFRS, the concept of constructive obligation applies
  • under IFRS a provision is recognized when probability of loss is probable (rather than likely); threshold for ASPE is higher
  • under IFRS, when there is a range and no best estimate, take midpoint
  • under IFRS, you need to review provisions @ end of every period
  • under IFRS, contingent assets are disclosed when probable to be realized (rather than likely)
  • under IFRS, there is detailed guidance on Restructuring
  • Under IFRS, onerous contracts and reimbursements are covered

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