AFM391 Lecture Notes - Lecture 7: Contingent Liability, Disclose
28 Jun 2018
School
Department
Course
Professor
CONTINGENCIES
D.
Contingency
is an existing condition that depends on the outcome of one or more future events
•
Probable:
> 50%
○
Remote:
5%
-
10%
○
Possible:
50% or less but greater than remote
○
Three range of probabilities:
•
Contingencies involving potential outflows1.
AFM 391 Page 13
Document Summary
Contingency is an existing condition that depends on the outcome of one or more future events. Possible: 50% or less but greater than remote. When the future outflow is probable and measurable e. g. manufacturer that includes a warranty. The manner in which the best estimate of a provision is measured is governed to some extend by whether the provision relates to a large population (warranty) or a single item (law suit). With the single item, the best estimate is determined using the most likely outcome. e. g. if the court says 70% to reward 500k or 30% to reward 300k, 500k will be recorded. When the possibility is only possible but not probable, then the enterprise would not be required to recognize a liability. Just disclose the fact that it has a contingent liability. Also when the outflows are probable but cannot be measured reliably. A present obligation that arises from past events that is not recognized because i. ii.
