Response to Client Request II - Essay Example

Running head: ACCOUNTING FOR LOSS CONTINGENCIES ACCOUNTING FOR LOSS CONTINGENCIES OF INSTITUTE) Running head: ACCOUNTING FOR LOSS CONTINGENCIES 2 Accounting for loss contingencies will depend upon the judgment on the possible outcome of the event resulting to the contingency. ASC 450 – 20 provides for three different outcome: remote, reasonably possible and probable.If the loss contingency is remote, there is no need to disclose the said contingency or accrue any amount for the loss.If the loss contingency is reasonably possible, there is also no need to accrue the amount of the loss but a disclosure is required (ASC 450-20-55-13).

If the loss contingency is probable but the amount cannot be reasonably estimated, only a disclosure is required. If the loss contingency is both probable and the amount of loss can be estimated, paragraph 450 – 20 – 25 – 2 of the ASC requires the company to accrue the estimated loss (with a charge to income) and make the necessary disclosures. If the estimated loss is actually composed of a range of amounts, and no amount is a better estimate within this range, the requirement is to accrue the lowest amount and disclose the difference between the highest amount in the range and the amount accrued as this will inform the financial statement reader that more losses may be paid in the future (ASC 450 – 20 – 55 – 18 and ASC 450 – 20 – 55 – 36).

Regarding the mortgage of the company, any disclosure or adjustment in the balances will depend upon the results of the company’s negotiation with its mortgage lender. Any gain or loss resulting from the negotiation needs to be recognized in the current period in accordance with ASC 60 – 35. If the company files for a Chapter 11 or if the mortgage is rewritten, rewriting or writing off of the mortgage will still depend on the outcome of such negotiations.As to the intangible asset, namely the patent, if the loss contingency becomes probable, the company will need to record an impairment for the patent, such impairment will be charged to the company’s current income as loss (ASC 350 – 30 – 35 – 11).

On the other hand, the hedge (assuming that it does meet the requirements for it to be designated as a hedge under ASC 815 – 20), the net gain related to the patent, which was originally recognized under accumulated other comprehensive income, shall be reclassified and recognized as part of the company’s earnings under ASC 815 – 30 – 35 - 43.ReferencesFinancial Accounting Standards Board. ASC 450 – 20: Loss Contingencies. Retrieved from: http://asc.fasb.org/section&trid=2127173%26analyticsAssetName=subtopic_page_subsection%26nav_type=subtopic_page#topic-450-20-25-subsect-01-108346.

Financial Accounting Standards Board. ASC 350 – 30: General Intangibles Other than Goodwill. Retrieved from: http://asc.fasb.org/subtopic&trid=2144471&nav_type=left_ nav&analyticsAssetName=subtopic_page_left_nav_subtopic. Financial Accounting Standards Board. ASC 815 – 30: Cash Flow Hedges. Retrieved from: http://asc.fasb.org/subtopic&trid=2229291&nav_type=left_nav&analyticsAssetName=subtopic_page_left_nav_subtopic.