Contingencies Define what a contingency is, describe the auditor's main concerns about them, and indicate how contingencies should be dealt with by management and the auditor. Besides litigation, claims and assessments, what are some other types of contingencies?
Contingencies are potential gain or losses that management may incur because of what may or may not occur in the future, e.g., a lawsuit against the client. In ASC 450 (formerly SFAS No. 5, "Accounting for Contingencies"), the FASB provides the standard by which they are to be judged and dealt with. If they are judged to be probable and reasonably estimable as of year-end, then management is responsible to accrue any losses (gains are not recognized). Disclosure is required of contingencies that are probable but not estimable or that are reasonably possible. Contingencies that are remote of occurrence don't require disclosure unless it is a common practice, for example, the guarantee of another company's debt.
Besides litigation, claims and assessments, other types of contingencies include purchase and sales commitments, agreements to repurchase receivables that have been sold, and guarantees of the debts of others.
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