Question

FAS 5 requires contingent liabilities to be recorded as liabilities on the balance sheet if the likelihood of loss or payment is:

a) remote
b) resonably possible
c) probable
d) not determinable

Answer 1

Contingent liabilities are recorded on the balance sheet only when their occurrence is probable, meaning the likelihood of loss or payment is greater than 50%.

Step-by-step explanation:

FAS 5, now known as ASC 450, stipulates that contingent liabilities should be recorded as liabilities on the balance sheet if the likelihood of loss or payment is 'probable', which implies that the event is more likely than not to occur (i.e., the occurrence is greater than 50%). If the likelihood is described as either 'reasonably possible' or 'remote', the contingent liability should instead be disclosed in the notes to the financial statements or not reported at all, respectively. It is essential for companies to assess contingent liabilities accurately to maintain compliance with accounting standards and provide clear financial reporting.