Page 343 - Auditing Standards

As of December 15, 2017
concepts of accounting accrual and disclosure specified for the accounting profession in Statement of

Financial Accounting Standards No. 5 ("FAS 5") issued by the Financial Accounting Standards Board in
March, 1975.

5.1 Accounting Requirements

To understand the significance of the auditor's inquiry and the implications of any response the lawyer may
give, the lawyer should be aware of the following accounting concepts and requirements set out in FAS 5: ||

(a) A "loss contingency" is an existing condition, situation or set of circumstances involving uncertainty
as to possible loss to an enterprise that will ultimately be resolved when one or more events occur

or fail to occur. Resolutions of the uncertainty may confirm the loss or impairment of an asset or
the incurrence of a liability.

(Para. 1)

(b) When a "loss contingency" exists, the likelihood that a future event or events will confirm the loss

or impairment of an asset or the incurrence of a liability can range from probable to remote. There
are three areas within that range, defined as follows:

(i) Probable—"The future event or events are likely to occur."

(ii) Reasonably possible—"The chance of the future event or events occurring is more than
remote but less than likely."

(iii) Remote—"The chance of the future event or events occurring is slight."

(Para. 3)

(c) Accrual in a client's financial statements by a charge to income of the period will be required if both

the following conditions are met:

(i) "Information available prior to issuance of the financial statements indicates that it is
probable that an asset had been impaired or a liability had been incurred at the date of the

financial statements. It is implicit in this condition that it must be probable that one or more
future events will occur confirming the fact of the loss." (emphasis added; footnote omitted)

(ii) "The amount of loss can be reasonably estimated."

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