Contingent Liabilities

One way many businesses do this is by hiring workers as “independent contractors” rather than as regular employees. Unlike rules for regular employees, a business does not have to pay Social Security (FICA) taxes and unemployment insurance payments for independent contractors. Similarly, it does not have to withhold federal, state, or local income taxes or the employee’s share of FICA taxes. The IRS has a “20-factor test” that determines whether a worker should be considered an employee or a contractor, but many businesses ignore those rules or interpret them loosely in their favor. Howe’s attorney advises that it is probable Howe will lose this lawsuit.

Adjusting events after the reporting date
are those that provide additional evidence of conditions that existed at the
reporting date. For large populations journal entry for contingent liability of similar
obligations, a weighted outcome should be used. Should there be a
continuous range of values of equal possibility, the mid-point
should be used.

Some examples of provisions

By discounting a note with recourse, the endorser has a contingent liability. A contingent liability is a possible liability that may or may not occur depending on some future event. Liabilities are recorded at their face amount (i.e., principal) when they can be paid in full by using existing resources legally available to the entity; thus, no premium is required for bearing this risk. Also, assuming no extraordinary or unusual circumstances exist, liabilities must not be recorded at more than the amount payable in exchange for goods or services received. Unfortunately, this official standard provides little specific detail about what constitutes a probable, reasonably possible, or remote loss.

However, when the inflow of benefits is virtually certain an asset is recognised in the statement of financial position, because that asset is no longer considered to be contingent. A contingent liability is not recognised in the statement of financial position. However, unless the possibility of an outflow of economic resources is remote, a contingent liability is disclosed in the notes. In order for a contingent liability to be recorded as a journal entry it must be probable and reasonably estimable. The accrual involves debiting and increasing a loss account and crediting and increasing a liability account.

Connect With a Financial Advisor

However, if it is probable that a loss has been incurred at the date of the Financial Statements and it can be reasonably estimated, an appropriate disclosure in the footnotes to the Financial Statements should be made. Make the journal entry to record Valuepoint’s expense for White’s total earnings for the year, his payroll deductions, and net pay. Credit liability accounts for the payroll deductions and Cash for net pay. Consequently, no change is made in the $800,000 figure reported for Year One; the additional $100,000 loss is recognized in Year Two. The amount is fixed at the time that a better estimation (or final figure) is available. This same reporting is utilized in correcting any reasonable estimation.

Certain outcomes relating to a provision or
contingent assets may represent very high or low potential outflow or inflow
for the UN. It is therefore important to carefully assess the circumstances
that may give rise to provision recognition or contingent asset disclosure to
avoid excessive or exaggerated recognition of provisions in the financial
statements. No specific module exists in Umoja for the
processing of provisions contingent liabilities, contingent assets and Events
after the Reporting Date.

Recognition of a provision

Notes receivable are usually categorized as current assets, because companies expect to receive them within the next 12 months. However, notes receivable that are not expected to be paid for a period of more than a year may be classified as non-current assets. This is done by giving a discount on notes receivable to a bank or other lender prior to their maturity date.

• Sierra Sports may have more litigation in the future surrounding
  the soccer goals.
• The journal entry below would be recorded on 31 December 20×1, when the first payment is made.
• Make the journal entry to record Valuepoint’s expense for White’s total earnings for the year, his payroll deductions, and net pay.
• This differs from adjustments to
  provisions described in section 3.1.4 below, as reversals involve derecognition
  of all or part of a provision (i.e. they no longer meet the provisions
  recognition criteria).
• Since the outcome is possible, the
  contingent liability is disclosed in Sierra Sports’ financial
  statement notes.

This financial
recognition and disclosure are recognized in the current financial
statements. The income statement and balance sheet are typically
impacted by contingent liabilities. The information is still of importance to decision makers because future cash payments will be required. However, events have not reached the point where all the characteristics of a liability are present. Thus, extensive information about commitments is included in the notes to financial statements but no amounts are reported on either the income statement or the balance sheet.

Probability of occurrence

Since the
company’s inventory of supply parts (an asset) went down by $2,800,
the reduction is reflected with a credit entry to repair parts
inventory. First, following is the necessary journal entry to
record the expense in 2019. A subjective assessment of the probability of an unfavorable outcome is required to properly account for most contingences. Rules specify that contingent liabilities should be recorded in the accounts when it is probable that the future event will occur and the amount of the liability can be reasonably estimated.