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Requirements for Accrual Loss Contingency

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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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 ...

Solution Summary

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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