Discussion on Loss Contingency

Discuss fully the accounting treatment and disclosures that should be accorded the casualty and related contingent losses in the financial statements dated December 31, 2012.

For a company to record a liability, it does not need to have information on the exact payee or date payable (Kieso, Weygandt, & Warfield, 2012). The company must know whether it is probable, it incurred the liability. In the case of this scenario, the loss contingency is loss due to the explosion of the company’s storage tank. The incident occurred on February 1, 2013, and by February 15, 2013, no one had filed a lawsuit against the company. However, the company’s financial statements as at December 31, 2012, were sent at that time. The information available before the company issued its financial statements indicates that it is probable that the company incurred the liability at the date of the financial statements. The company will not accrue loss related to explosion because it is hard to estimate the amount of loss (Kieso, Weygandt, & Warfield, 2012). It is difficult for the company to adequately estimate the costs associated with the loss due to an explosion. Moreover, the company is also unable to assess the certainty of such risks becoming reality.

Since the loss is probable but the company cannot estimate the amount of loss, it is ideal to disclose these facts in the current period. Besides, the accrual of the loss should be made earlier when it is possible to estimate the amount of loss. In the future periods, the accrual of the loss is a change in estimate.



Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2012). Intermediate Accounting. Jonh Wiley & Sons.


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