Video: Loss Contingencies

In this lesson, Nick Palazzolo, CPA, breaks down the intricacies of accounting for loss contingencies. He clarifies the differences between conditions that would require a footnote disclosure versus those warranting a recorded estimate in the financial statements. Through practical examples, Nick illustrates when a company like Disney must recognize various lawsuits, mentioning the significance of categorizing these contingencies as 'reasonable possible', 'probable', or 'remote'. He also discusses the accounting treatments for potential receivables and subsequent events such as natural disasters or litigation, and rounds out the lesson with a look at warranty obligations and their impact on financials as potential future losses.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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This is for loss contingencies. Although maybe I should have had a title, right? Because that handwriting is hard. But you know what? I was not trained in handwriting. I was trained in accounting. All right, now these will generally be stated in the examples and the questions. So it'll say, okay, it's reasonably possible that you're going to lose the lawsuit. Well, in that case, you're going to footnote it. You're not going to record it. You're not going to make a dollar amount in the financials, but you're going to just footnote it, disclose it. If it's probable, and you can reasonably estimate how much it's going to cost you as a result of the lost lawsuit, then, yeah, you're going to record the financial statements as an estimate, as a contingent loss, and the number is going to be there. Now, if it's remote, meaning we really don't think this is going to happen, right? Because if Disney had to, you know, just a big company like Disney had to account for every lawsuit against them, and they'd have an insane amount of lawsuits against them from companies, from customers, from people, from every kind of entity, from governments. So these are the treatments for loss contingencies.

Now, what do we have next? We have a little bit more on loss contingencies. So these involve a possible future loss whose existence is proven by a subsequent event. Possible and collectible receivables. So a contingent liability might be or a loss contingency. We thought we were going to collect a million dollars, but we only collected $900,000 from our customers, and that $100,000 needs to be written off yet to be determined losses.

So, okay, we know that a warehouse was destroyed by a flood. We don't know how much

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Module: 8 Concepts, 74 Videos

Accounting Changes and Error Corrections Overview and Objectives

1:31

Types of Accounting Changes

2:56

Changes in Accounting Principle

3:38

Changes in Accounting Estimate