Answered Essay: Discuss fully the accounting treatment and disclosures that should be accorded the casualty and related contingent losses in the financial statements dated December 31, 2017.

On March 1, 2017, a damaged pipeline at a Royal Blue deep water production field, about 100 miles off the Louisiana coast, spilled what’s been officially estimated at 90,000 gallons of oil into the Gulf of Mexico before the leak was stopped. As of March 15, 2017 (when the December 31, 2016 financial statements were completed and sent to the publisher for printing and public distribution), no suits had been filed or claims asserted against the company because of the spill. The company fully anticipates that suits will be filed and claims asserted for damages. Because many of the casualties were uninsured and the company is considered at fault, Royal Blue will have to cover the damages from its own resources. Respond to the following prompts:

What conditions must exist before a loss contingency can be recorded in the accounts?

Discuss fully the accounting treatment and disclosures that should be accorded the casualty and related contingent losses in the financial statements dated December 31, 2017.

Expert Answer


An anticipated loss from a contingency loss shall be accumulated by a charge to income if information accessible prior to issuance of the financial statements signifies that it is feasible that an asset had been impaired or a liability had been occurred at the date of the financial statements. It is implicit in this situation that it must be probable that one or more future proceedings will happen substantiating the actuality of the loss and the sum of loss can be realistically anticipated.

Disclosure of the nature of an accrual made pursuant to the provisions of paragraph 8, and in some situations the sum accrued may be obligatory for the financial statements not to be misleading.

Disclosure of the contingency loss shall be done when there is at least a realistic prospect that a loss or an additional loss may have been occurred. The exposure shall specify the character of the contingency and shall give an estimation of the probable loss.

Disclosure is not necessary of a contingency loss relating to an unasserted claim or estimation when there has been no materialization by a prospective claimant of an understanding of a potential claim or evaluation unless it is considered feasible that a claim will be affirmed and there is a realistic prospect that the conclusion will be adverse.

After the date of an organization’s financial statements but before those financial statements are issued, information may become accessible signifying that an asset was damaged or a liability was sustained after the date of the financial statements or that there is a slightest sensible prospect that an asset was impaired or a liability was incurred after that date.

The information may relate to a loss contingency that subsist at the date of the financial statements for instance an asset that was not covered at the date of the financial statements. Information may relate to a loss contingency that did not subsist at the date of the financial statements.

For instance risk of expropriation of assets after the date of the financial statements or the filing for insolvency by an organization whose obligations were assured after the date of the financial statements.

In none of the instance there was an asset impaired or a liability occurred at the date of the financial statements, and the provisions for accrual as per the accounting standards is therefore not met.

Disclosure of these kinds of contingency losses may be required to ensure the financial statements are not misleading. If disclosure is considered obligatory, then the financial statements shall indicate the contingency loss and shall give an approximation of the possible loss or may specify that such estimation cannot be made.

Loss occurring after the date of the financial statements where the amount of asset impairment or liability occurrence can be sensibly anticipated, disclosure may best be made by supplementing the past financial reports with pro forma financial information giving effect to the loss as if it had incurred at the date of the financial statements.

Some contingency losses are disclosed in financial statements even though the possibility of loss may be distant. For instance assurance of indebtedness of others, obligation of commercial banks under “standby letters of credit,” and assurances to repurchase receivables that have been sold.

The Board may decide that disclosure of these kind contingency losses that have a substantial value shall be continued. The disclosure shall comprise the nature and sum of the guarantee.

There should be concern of disclosing if estimable the value of any recovery that could be anticipated from the guarantor’s right to proceed against a third party. The financial statements shall disclose the accounting procedure as well as the character of the accumulation and the source for estimation. The sum of any associated liability or asset valuation account incorporated in every balance sheet presented.

A contingent liability that is equally feasible and the amount can be anticipated is recorded as an expense or loss on the income statement and a liability on the balance sheet.

A contingency loss which is probable but not possible, or the amount cannot be anticipated, will not be documented in the books of accounts relatively, it will be disclosed in the notes to the financial statements.

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