One generally accepted accounting policy relates to contingent losses. If the loss is reasonably measurable and likely to be incurred, the amount is accrued in the financial statements. If the amount is not measurable or is not likely to be incurred, then the potential loss is disclosed but not recorded. Also, if the probability of payment cannot be determined (is not estimable) the possibility of a loss is disclosed but not recorded. For example, this policy can be directly applied to lawsuits. If a company is being sued by a disgruntled ex- customer, and the matter is before the courts, there can be a long delay in dispute resolution. A company will record a loss from the lawsuit prior to the court decision only if an amount, if any, of the court- ordered award can be predicted, and it appears likely that the company will lose the lawsuit or agree to a settlement. If an amount is not recorded, the existence of the lawsuit is explained in the disclosure notes.

Required:

1. List the recognition criteria.

2. Explain the accounting policy for contingent losses with reference to the recognition criteria.