Requirements for Accrual Loss Contingency
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The two basic requirements for the accrual of a loss contingency are supported by several basic concepts of accounting. If you should examine how the two basic requirements for accrual of a loss contingency relate to the following concepts:
1. Periodicity (time period)
2. Measurement
3. Objectivity
4. Relevance
Please do the following:
1. Provide points of examination on how the two basic requirements for accrual of a loss contingency relate to the concept of periodicity.
2. Provide the points of examination on how the two basic requirements for accrual of a loss contingency relate to the concept of measurement.
3. Provide the points of examination on how the two basic requirements for accrual of a loss contingency relate to the concept of objectivity.
4. Provide the points of examination on how the two basic requirements for accrual of a loss contingency relate to the concept of relevance.
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This response looks at the requirements for accrual of a loss contingency and how this relates to periodicity, measurement, objectivity, and relevance.
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Firstly, According to Financial Accounting Standards Board (FASB) Statement No. 5, "Accounting for Contingencies" (FAS 5), is still considered to be one of the most significant of all accounting standards; it provides the fundamental guidance for recognition of estimated losses from virtually all loss contingencies."
Secondly, the key concept of the statement is that: An estimated loss from a loss contingency . . . shall be accrued by a charge to income if both of the following conditions are met:
(a) Information prior to the issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements...and it is probable that one or more future events will occur ...
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