Response to Client Request Ii Essay

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Response to Client Request II ACC 541 May 13, 2013 MEMORANDUM To: Client Date: May 13, 2010 ------------------------------------------------- Re: Lawsuit - Contingencies & Financial Statements Report Requirements for Contingencies With our client being sued, it is important for them to understand the importance of contingencies and how the lawsuit will affect their financial statements if they lose the lawsuit. “Contingencies are existing uncertainties that may have financial impact, depending on future events” (Financial Accounting Standards Board, 2013). There are two types of contingencies our client should be aware of. Loss contingencies are anything that will result in a liability or any impairment of an asset. There are also gain contingencies that will result when an acquisition of reduction of an asset liability. When it comes to a loss contingencies are client should be aware that a liability is recognized for a contingency loss when, “the underlying causal event has occurred prior to the balance-sheet date, it is probable that a loss has been incurred, there is a reasonable basis for estimating that loss” (Financial Accounting Standards Board, 2013). There are four gain contingencies that will result in an asset or reduction of a liability. This includes receipts of any money that are received from gifts or donations, refunds from the government when there are resolved tax disputes, any court cases that are pending and where the outcome is in favor of the company, and any tax loss for carry forwards. Since our client is facing a lawsuit there are three factors that they should place on their financial statement. This includes, “the time period in which the underlying cause of action occurred, the probability of an unfavorable outcome, and the ability to make a reasonable estimate of the amount of the loss” (Financial Accounting

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