How To Correctly Understand And Deal With Contingencies

With the development of China's market economy, the pformation of business mechanism, the diversification of financing channels and the complication of financial relationship, the specific economic phenomenon of contingency has been increasingly existing in the business activities of enterprises.

In view of the fact that the current legal system is not perfect in China, in the face of fierce market competition, the adaptability and legal consciousness of enterprises are generally poor. This determines that the incidence and possibility of contingencies are much larger than those of western countries.

Contingencies, as a potential factor, directly affect the continuous operation and development of enterprises. Because of the final loss of the corresponding losses, enterprises are in trouble, resulting in a large number of cases of mergers and bankruptcies.

Therefore, we must seriously consider and treat them correctly.

An item refers to a situation formed by pactions or events in the past, and the result must be confirmed by the occurrence or non occurrence of future uncertain events, or the present obligations formed by past pactions or events. It is not likely that the obligation to fulfill the obligation will result in the outflow of the economic interests or the amount of the obligation can not be reliably measured; or the assets refer to the potential assets formed by past pactions or events, and their existence must be confirmed by the occurrence or non occurrence of uncertain events in the future, or the basic characteristics of the items: 1.. The relationship between contingencies and contingent assets, contingent liabilities and assets and liabilities.

The results of 2. contingencies are uncertain. They are mainly manifested in two aspects: on the one hand, whether the result of the contingency is happening or not; on the other hand, the result of the contingency may be expected even if the result of the contingency occurs, but the time of the occurrence or the amount of the birth is uncertain.

The results of 3. contingencies can only be determined by future events.

4. factors that affect the outcome of a contingency cannot be controlled by an enterprise.

From the definition, we can see that there are three types of contingencies: one is a contingency that can be identified as liabilities, one is contingent liabilities and the other is assets. Contingent liabilities are potential obligations or cannot be reliably measured, and are not likely to happen.

The "enterprise accounting standards" defines assets: assets, which refer to resources formed or owned or controlled by past pactions or events, which are expected to bring economic benefits to enterprises.

The definition holds that assets have the following three characteristics: 1, is a resource.

Some non economic human and social resources make great contributions to the competitive advantage of enterprises.

Even if there is difficulty in accounting recognition and measurement, it should be included in the broad scope of assets.

For example, an enterprise formed by buying or building itself, or an account receivable formed by selling products, is the assets of an enterprise. It is expected that it will bring economic benefits to enterprises (3).

That is, assets are a kind of economic interest in the future. They have the ability to directly or indirectly earn future cash and net flow for enterprises. This is the purpose of enterprises' possession and control of assets, as well as a decisive criterion for distinguishing assets and expenses.

It should be said that at this point, it reflects the deepening of our accounting understanding of assets and truly grasps its essence.

The definition of liabilities is that liabilities refer to the current obligations arising from past pactions or events, and the obligation to fulfill them is expected to cause economic benefits to flow out of the business.

It can be seen that liabilities are characterized by the following characteristics: the right and wrong is the present obligation.

That is to say, liabilities are incurred by enterprises' past pactions or events, and the obligation to decide on future pactions or events, if the possibility of their occurrence is very large, that is, the performance of the obligation is likely to lead to the outflow of economic interests, which should be recognized as liabilities.

The liabilities that an enterprise undertakes is a sacrifice that can not be avoided or rarely avoided in the future. Sometimes, enterprises must bear certain moral or presumptive obligations in order to maintain their credibility or conduct normal business, such as product guarantee obligations, etc., should also be included in liabilities.

Sometimes, an enterprise can settle this current obligation by undertaking new liabilities or pforming into owner's equity.

In short, the liquidation of liabilities will inevitably lead to the outflow of economic benefits.

According to their different nature, contingencies may be divided into gains or losses.

The result is that 1 liabilities may result in a decrease in liabilities or gains or gains in assets, which may bring benefits to enterprises. Therefore, it is known that there are gains or losses, and the corresponding enterprise assets are called contingent assets.

The characteristics of the contingent assets are: (2) the result may be indebtedness or the reduction of assets or contingencies may cause losses to the enterprise, so it is called "contingent loss".

Contingent loss does not mean contingent liabilities.

"International accounting standards thirty-seventh - ready, contingent liabilities and contingent assets" defines "contingent liability" as a potential obligation arising from past events, which is confirmed by the occurrence or absence of future uncertain events. Or because of the obligations arising from past events, it is not likely that the obligation to fulfill the obligation will result in the outflow of economic benefits or the amount of the obligation can not be measured reliably and reliably.

It can be seen that contingent liabilities include two types of obligations: one is potential obligations, the other is special current obligations.

What is special about the obligation is that the performance of the present obligation is not likely to cause the economic benefits to flow out of the enterprise or the amount of the current obligation can not be reliably measured.

Two, accounting principles for contingencies, international accounting standards, accounting rules for contingencies generally follow the following principles: 1. principles of stability.

It is necessary to fully anticipate possible costs and losses without anticipate possible benefits.

2. principles of importance.

It is necessary to differentiate and handle different important items.

The importance of contingencies can be determined by the size of the relative amount and the probability of occurrence.

The principle of importance should be applied to deal with matters that are basic, probable, probable and minimal.

3., the principle of full disclosure.

It is required that the financial statements should fully disclose the information that affects the information decision making, and can not be reflected in the items in the accounting statements. It should be disclosed in the form of notes in the form.

The essence of 4. is the principle of form.

Substance is more important than form. When an economic entity of a paction or paction is not in conformity with the legal form, the accountant shall confirm, measure and disclose the paction according to the economic nature of the paction or the matter, rather than the legal form.

For example, China's "Enterprise Income Tax Administration Ordinance" does not allow the loss of uncertain factors to offset the amount of enterprise income, but in reality, it is reasonable to estimate the likely occurrence or contingency and enter into the current profits and losses of the enterprise.

In order to accurately grasp and skillfully apply the accounting treatment of contingencies in accounting standards or contingencies in enterprises, we must have a correct understanding of the possibility of occurrence of contingencies in three.

However, the specific probability is not explained; International Accounting Standards No. thirty-seventh: preparation, contingent liabilities and contingent assets do not specify the possibility level and probability; the Canadian Institute of Chartered Accountants considers that the possibility can be basically divided into four levels, and the probability is expressed as follows: "reasonable determination (reasonable certain)" corresponds to 95% one 100%, "probably (probable)" corresponds to 50% one 95%, "possibly (possible)" corresponds to 5% 50%, "minimum likelihood (remote)" corresponds to 0% 5%.. The division of the possibility of enterprise accounting standards or contingencies in China basically refers to the Canadian Institute of Chartered Accountants, but the name of "possibility" is slightly different, and the probability interval is different. The US Accounting Standards Board fifth guidelines bulletin divides the possibility into three grades: probable, possible and remote.

The division standard is "basic determination" greater than 95% but less than 100%, "likely" is greater than 50%, but less than or equal to 95%, "may" is greater than 5%, but less than or equal to 50%, "minimum likelihood" is greater than 0%, but less than or equal to 5%.. (1) confirm: when judging specifically whether or when something is confirmed, the "accounting standards for business Contingencies" gives specific confirmation conditions, and requires confirmation that the liabilities recognized for contingencies must satisfy the following three conditions: 1., 1., and 1..

It refers to the current obligation rather than the potential obligation for the enterprise to bear obligations related to contingencies.

2., the performance of this obligation is likely to cause economic benefits to flow out of the enterprise.

"Likely" means that the probability of occurrence is "greater than 50% but less than or equal to 95%".

Therefore, "this obligation is likely to cause economic benefits to flow out of the enterprise" means that the current obligations of fulfilling the contingency cause the possibility of outflow of economic interest by more than 50%, but it has not yet reached the level of basic determination.

3. the amount of the obligation can be measured reliably.

It means that the amount of current obligations arising from contingencies can be reasonably estimated, and the amount of current obligations arising from contingencies is also uncertain due to the uncertainty or contingency.

Neither the above three conditions cannot be recognized at the same time. In other words, only the estimated liabilities are allowed to be recognized in the accounting statements, all contingent liabilities should not be recognized in the accounting statements.

(two) measurement: when estimating the estimated amount of liabilities, China has given several ways to determine the best estimate: 1., if the estimated liability is in the range of a sum of money, the best estimate should be determined by the average of the upper and lower limit.

2.. If the estimated liabilities do not exist in the range of one amount, the best estimate of the time side will be determined according to the following methods: there are only one item involved in a contingency item, or there is only one item involved. The optimal estimate for the payment of the estimated liabilities should be determined on the basis of the most probable amount.

There are more than one item involved in a contingency item. There are more than one item involved. There are many forms of the estimated liabilities arising from the contingencies. For example, in the product quality assurance, there are many situations for the customers who require the product warranty, for example, major repairs and minor repairs, etc., involving a number of projects. The best estimate is determined according to the probability of occurrence and the probability of occurrence.

(three) disclosure: "accounting standards for enterprises - Contingencies" eighth stipulates that liabilities (estimated liabilities) recognized by contingencies should be reflected in separate items in the balance sheet and disclosed accordingly in the notes to the accounting statements, and the income statement should be reflected in the income statement after deducting the amount of compensation recognized or related to the recognized liabilities.

That is to say, the estimated liabilities for contingencies identified in the balance sheet should be differentiated from other liabilities items and reflect separately. At the same time, the cause and amount of the estimated liabilities should be disclosed in the notes to the accounting statements, so that the users of the accounting statements can get full and detailed information about the relevant items.

In recognition of liabilities for contingencies, the company should confirm an expenditure or expense, which should not be reflected in the profit statement but should be combined with other expenses or expenses items.

If an enterprise recognises the cost due to product quality assurance, the profit statement should be reflected as an integral part of the "operating expenses". If the enterprise recognises its liabilities due to providing guarantee for other units, it should be reflected as the constituent part of the "extra expenses".

If the compensation is basically determined, the compensation or expenses incurred in the enterprise profit statement should be deducted in advance.

In the case of assets, it should not be disclosed in the annotations of the statements. Only when they are likely to bring economic benefits to the enterprises, can they disclose the reasons for their formation and the expected financial impact.

The issues or items after the balance sheet day (four) or items or items are defined from the determinant characteristics of the event, and the matter after the balance sheet date is confirmed from the temporal characteristics of the events.

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