Accounting When A Contingency Is Recognized As A Liability

In April 2000, the Ministry of Finance issued the "accounting standards for enterprises - Contingencies" guidelines to standardize the recognition, measurement and disclosure of contingencies.

This paper intends to discuss the accounting and related information disclosure when the contingencies are recognized as liabilities.

The first thing is to identify contingencies as preconditions for liabilities. If the obligations are related to contingencies, if the three conditions are concurrently met, the enterprise shall identify the contingent liability as liabilities: 1.

For example, after a company's driver violates the regulations and causes serious traffic accidents, the company will bear the obligation of compensation, which is the current obligations of the company.

2, recognised as a liability or contingency, should be performed at the time of execution (probability greater than 50%, but less than or equal to 95%), resulting in economic benefits flowing out of the enterprise.

It should be noted that some obligations undertaken by enterprises due to contingencies do not always lead to economic benefits flowing out of enterprises.

For example, whether a company provides debt guarantee for a B enterprise, whether it may lead to economic benefits flowing out of a business, and depends on the future operation and financial status of B enterprise.

If the future business and financial situation of B enterprise is good, and there are no other special circumstances, it will not lead to economic benefits flowing out of a company, otherwise, it will lead to economic benefits flowing out of a company.

From this, we can see that the debt guarantee provided to other enterprises, though it is a matter of concern, should not be recognized as a liability until the maturity of the secured debt.

Similarly, there is the obligation of bill discounting and endorsement pfer, whether the acceptor has the ability to accept the bill, which is difficult to determine before the maturity of the bill.

Therefore, before the maturity of the bill, it should not be recognized as liability.

3, the amount of a contingency recognized as a liability should be reliably measured. If the amount of the current obligations is not reliably measured, it can not be recognized as a liability.

Two, recognised as the amount of liabilities or contingencies, the amount of contingencies recognized as liabilities should reflect the principle of conservatism and, in general, should be the best estimate of the expenses required to liquidate the liability.

The best estimate can be determined in two cases: first, there is a sum of money in the required expenditure, and the best estimate should be based on the average of the upper and lower limit of the range.

Example 1, for example, a paper mill is located upstream of the river, and has been warned and punished by the EPA for many times because of its serious pollution.

In 2000, the business volume of the factory expanded rapidly, and the pollution of the river became more and more serious. In the middle of December of that year, the Municipal Environmental Protection Bureau made a strict economic punishment on the factory.

At the end of the year, the factory did not receive the administrative penalty decision of the Municipal Environmental Protection Bureau.

According to the punishment situation of the Municipal Environmental Protection Bureau and the environmental pollution level of the factory in the past year, the management authorities estimated that the fine may be between 800 thousand yuan and 1 million yuan on the basis of professional opinions.

A balance of 900 thousand yuan (fines) should be recognized in the balance sheet of the company in December 31st.

(see the third part of the entry), the two is that if there is no amount of money, there should be two cases to be identified: 1.

For example, example 2, for example, A machinery manufacturing company develops and produces a new product, which is popular after listing.

But not long ago (December 10, 2000) the B Research Institute filed a lawsuit against the court, saying that the new product developed by the A company and produced by the company used the patented technology of B Research Institute.

According to the lawyer's opinion, the probability of A losing the lawsuit is 80%.

If a lawsuit is lost, it will be compensated 600 thousand yuan and the cost of litigation is 100 thousand yuan.

Under such circumstances, the amount of debt that A should confirm is the best estimate of 700 thousand yuan.

(for the third part of the entry, 2), when a contingency is involved in a number of items, the best estimate is determined by the probability of occurrence and the probability of occurrence.

In case of 3, for example, in 2000, C sold 20 thousand products and sales amounted to 80 million yuan.

The company's product quality assurance clause stipulates that within one year after the product is sold, the normal quality problem will occur, and the enterprise will be responsible for maintenance free of charge.

According to past experience, the maintenance cost of smaller quality problems is about 1% of sales, and the quality of maintenance is about 2% of sales.

It is predicted that 80% of the products sold this year will not produce quality problems, 15% will have smaller quality problems, and 5% will have bigger quality problems.

Accordingly, the best estimate of the balance of liabilities of C company at the end of 2000 should be 200 thousand yuan [8000 x 1% x 15% + 8000 x 2% * 5%].

(see the third part of the entry), the company should pay attention to: if all or part of the expected liabilities are compensated by the third party, such as the insurance company, only when the amount of the compensation is basically determined, it can be recognized as assets alone, not directly from the recognized liabilities, and the amount of the confirmed compensation should not exceed the book value of the confirmed liabilities.

Three, the disclosure of a contingency that is recognized as an indebtedness and an accounting case, the enterprise shall reflect the contingency items recognized as liabilities in the balance sheet with "projected liabilities" items, so as to distinguish them from other liabilities.

At the same time, the cause and amount of the estimated liabilities should be disclosed correspondingly in the notes to the accounting statements, so that the users of the accounting statements can get sufficient and detailed information about relevant items.

The expenses or expenses associated with the identified liabilities should be combined with other expenses or expenditure items (such as "operating expenses", "extra operating expenses" and "administrative expenses").

The accounting records of the above 1 cases are as follows: external expenses, a fine of 900 thousand yuan, and a debt of 900 thousand yuan, and at the same time, the paper factory should also make the following disclosure in the notes to the balance sheet: "Estimated Liabilities: the city's Environmental Protection Bureau will pay financial penalties for the serious pollution caused by the production and operation of a river."

At the end of the year, the factory did not receive the decision on administrative penalty.

Owing to the above situation, our factory has confirmed a liability of 900 thousand yuan. "

The payment of the penalty in the profit statement should be reflected with other outlay expenses, without the need for a single item.

The accounting records of the above 2 cases are as follows: management fees, litigation costs, 100 thousand yuan, external expenses, expenses for compensation, outlays, expenses, expenses, compensation, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, expenses, etc., and on the balance sheet of the A machinery manufacturing company shall be disclosed as follows: "Estimated Liabilities: in December 10, 2000, the B Research Institute sued the company for the production and sale of new products, which infringed its patent technology, and demanded compensation of 600 thousand yuan."

The company should sue, and the lawsuit is still under trial.

Owing to the above situation, our factory confirmed that it was in debt of 700 thousand yuan in December 31, 2000, including 600 thousand yuan for compensation and 100 thousand yuan for litigation costs.

According to the above analysis, C company needs to pay 200 thousand yuan for the products sold in 2000 in 2001, according to the previous analysis.

Therefore, C company should expect a debt of 200 thousand yuan (maintenance fee) in December 31, 2000.

Suppose that the balance of the C company's "expected liability product quality assurance" subject was 150 thousand yuan in early 2000, and the maintenance cost of product quality assurance in 2000 was 140 thousand yuan.

It's still 10 thousand yuan.

In the end of the year 2000, the actual amount of debt recognition should be 20-1 or 190 thousand yuan when the liabilities of a product quality assurance account for more than 10 thousand yuan before confirming the liabilities of 200 thousand yuan. In this case, the accounting entry is: "C": the operating cost of a product quality guarantee is 190 thousand yuan, and the quality of the product is 190 thousand yuan. At the same time, the company should also make the following disclosure in the notes to the balance sheet.

On the basis of relevant circumstances, the company also confirmed the liabilities amounting to 190 thousand yuan in December 30, 2000 on the basis of the product quality assurance cost balance of 10 thousand yuan.