A foreign subsidiary of a U.S.-based company has been notified of a loss conting

Question

A foreign subsidiary of a U.S.-based company has been notified of a loss contingency with an estimated cost ranging between $220,000 and $250,000 which is probable of resulting in an actual loss. Each dollar amount within this range of cost is equally likely of being the actual outcome. (Note: You must show your work to receive extra credit.) 4. a) Record the amount recognized according to U.S b) Record the amount recognized according to IFRS c) Prepare the conversion worksheets to convert U.S. GAAP to IFRS. d) Prepare the journal entry to convert the 2017 Pillow Ltd. financial statements from IFRS to U.S. GAAP.

Explanation / Answer

Ans a) As per US GAAP - General loss contingencies are only recognized when they are reasonably estimable. When there is a range of possible outcomes for a general loss contingency, the amount accrued should be the most likely outcome within the range. If no single outcome within the range is more likely than the others, the minimum amount in the range should be accrued. Hence in the given scenaria - amount to be recognised under US GAAP would be $ 220,000

Ans b) IFRS defines a provision as “a liability of uncertain timing or amount.” As per IFRS, A loss must be probable to be recognized. Probable is interpreted as more likely than not (i.e., a probability of greater than 50 percent). Provisions must be reliably estimable to be recognized. When there is a range of possible outcomes for a provision, the amount accrued should be the best estimate of the obligation. If no single outcome within the range represents the best estimate, the midpoint of the range should be accrued. Hence in the given scenario, the mid point of the range between $220,000 to $250,000 is $235,000 [($220,000+$250,000)/2]. Hence $235,000 should be recignised under IFRS.

Ans c) Conversion of US GAAP to IFRS

As per US GAAP - loss to be recognised - $220,000

As per I F R S - loss to be recognised - $235,000

Difference - $ 15,000

IFRS is more conservative in recognizing contingency losses. Accordingly, the loss is recorded for IFRS only, with a corresponding liability on the balance Sheet. US GAAP only requires disclosure in this situation.

Hence in IFRS balance sheet, a provision shall be created for contingent loss payable amounting to $15,000 and which shalll be shown under Non-Current Liabillities.

Ans d) Accounting entry for conversion of FS from IFRS to US GAAP

Contingency Liability payable account Dr ........$15,000

To Contingent Loss -.........................................$15,000

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