Chapter 13 In The Textbook

Chapter 13 In The Textbookwritemake Sure Your Response Addressing The

Chapter 13 in the textbook discusses the accounting treatment and estimation methods for contingent losses under different accounting standards. The assignment asks for a discussion on how U.S. GAAP and IFRS differ in their approaches to estimating contingent losses, the differences in terminology, and the importance of understanding these differences.

Under U.S. Generally Accepted Accounting Principles (GAAP), contingent losses are recognized when it is probable that a loss has been incurred and the amount can be reasonably estimated (FASB, 2018). Probable, in this context, is generally defined as a high likelihood, typically over 70%, that a loss will occur, and once this threshold is met, the loss must be accrued in the financial statements. U.S. GAAP emphasizes a more conservative approach, often requiring earlier recognition of potential losses to ensure that financial statements do not overstate financial health.

In contrast, the International Financial Reporting Standards (IFRS) tend to employ slightly different terminology and criteria for recognizing contingent losses. IFRS uses terms such as 'probable' with a lower threshold compared to U.S. GAAP, often implying a greater emphasis on the weight of evidence rather than a strict percentage (IFRS Foundation, 2020). Specifically, IFRS 37 states that a provision should be recognized when an entity has a present obligation as a result of a past event, and it is more likely than not that an outflow of resources will be required to settle the obligation, which generally corresponds to a threshold of over 50% likelihood.

The differences in terminology are significant because they influence when and how companies recognize contingent liabilities in their financial statements. Under U.S. GAAP’s more conservative standard, companies might delay recognition until the likelihood of loss is very high, potentially understating liabilities in early stages. Conversely, IFRS's lower threshold might lead to earlier recognition, impacting reported liabilities and financial ratios. Understanding these differences is crucial for investors, auditors, and regulators to accurately interpret financial statements across different jurisdictions, recognizing that similar events might be accounted for at different points in time depending on the standard applied (KPMG, 2019).

Furthermore, the estimation of contingent losses involves judgment, which makes it essential for preparers to be aware of the specific criteria under each standard. Variations in terminology and threshold criteria could affect the reported amounts, disclosures, and ultimately, the perceived financial health of an organization. For global companies operating in multiple jurisdictions, comprehending these differences aids in ensuring compliance and comparability of financial reports.

References

• FASB. (2018). Accounting Standards Update No. 2018-07: Improvements to Accounting for Long-Duration Contracts and Contingencies.
• IFRS Foundation. (2020). International Accounting Standard 37 Provisions, Contingent Liabilities and Contingent Assets.
• KPMG. (2019). Comparing US GAAP and IFRS: A practical guide. KPMG International.
• Financial Accounting Standards Board (FASB). (2018). Accounting Standards Codification Subtopic 450-20: Contingencies.
• International Financial Reporting Standards (IFRS). (2020). IAS 37 — Provisions, Contingent Liabilities and Contingent Assets.
• Stice, J. D., Stice, E. K., & Skousen, C. J. (2019). Financial Accounting. Nelson Education.
• Economic and Accounting Perspectives on Contingent Liabilities. Journal of International Accounting Research, 17(2), 35-50.
• Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial Accounting Theory and Analysis. Wiley.
• Bright, D. (2017). International Financial Reporting Standards (IFRS): An Introduction. Routledge.
• Williams, J., & Levie, B. (2018). Exploring the differences in accounting standards across jurisdictions. Journal of Accounting and Public Policy, 37(4), 415-427.