Contingent Losses: Recognition Criteria and Implications for CFA® Level 1 Exam Preparation

Contingent Losses: Recognition Criteria

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Question

Contingent losses are recognized:

I. when they actually occur during a contingency.

II. only if it is probable that a loss will occur.

III. only if the amount of the loss can be reasonably estimated.

IV. at the management's discretion.

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Explanations

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A. B. C. D.

A

II and III must hold together for a recognition of contingent losses to take place. GAAP defines "probable" as "greater than 50% chance." Since this is subjective, the management has considerable discretion on the timing of recognition.

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