Please respond to one of the following topics. TOPIC 1: Try this for planning yo

Question

Please respond to one of the following topics.

TOPIC 1: Try this for planning your own retirement account:  Given a stated level of biweekly or monthly contributions, any employer matching added in, an assumed average annual earnings, and the expected number of years until you retire, calculate the expected size of your retirement account. And please remember that this exercise is for only one part of your financial future.

TOPIC 2: Many firms believe that it is very difficult to estimate the amount of a possible future contingency. Should a contingent liability be reported even when the dollar amount of the loss is not known? Should it be disclosed in the notes to financial statements? Explain.

Explanation / Answer

As contingencies are by nature vague and difficult to estimate, their treatment differs based on the degree to which a loss is probable. In some cases, disclosure in the footnotes alone is adequate. In others, accrual and recognition on the face of the financial statements is required.

The first step to be taken in deciding whether and how to account for a contingency is to verify its existence.

Second, once it is known that a loss contingency exists, the entity must determine where on a

Continuum-from remote to reasonably possible to probable-the contingency lies.

Third, the entity must perform one of the following actions:

If it is probable that a loss has been incurred at the date of the financial statements and the amount of loss can be reasonably estimated, the entity must accrue the loss and disclose related information. (Under this two-pronged test, the financial statement date is the cut off point for assessing whether an event has occurred, resulting in the probability that an asset was impaired or a liability incurred. The purpose of the two conditions for accrual is to require recognition in the current period’s financial statements when losses associated with the current or prior period are reasonably estimable.)

If it is not probable that a loss has been incurred or a probable loss cannot be reasonably estimated, the entity must disclose only related information.

If there is only a remote possibility of loss, the entity does not accrue or disclose the loss contingency (unless the contingency is with respect to guarantees).

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