ACCTG390W Cuyamaca College E Coves Financials Memo Read the pre-reading (405-20-40, 450-20-25, 450-20-55) and complete an around 2 page paper following the

ACCTG390W Cuyamaca College E Coves Financials Memo Read the pre-reading (405-20-40, 450-20-25, 450-20-55) and complete an around 2 page paper following the ICW facts_Issues_Analysis, directions for writing are included within ICW5 attachment. 1/14/2018
405-20-40 Derecognition – Print Friendly
January 14, 2018
405 Liabilities
20 Extinguishments of Liabilities
40 Derecognition
General Note: The Derecognition Section provides guidance on determining whether and when an entity
should remove an item from the financial statements. For example, the entity would derecognize an asset
because it no longer has rights to the asset or it would derecognize a liability because it no longer has any
obligation.
General
405­20­40­1 A debtor shall derecognize a liability if and only if it has been extinguished. A liability has
been extinguished if either of the following conditions is met:
a. The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor
includes the following:
1. Delivery of cash
2. Delivery of other financial assets
3. Delivery of goods or services
4. Reacquisition by the debtor of its outstanding debt securities whether the securities are
cancelled or held as so­called treasury bonds.
b. The debtor is legally released from being the primary obligor under the liability, either judicially or
by the creditor. For purposes of applying this Subtopic, a sale and related assumption effectively
accomplish a legal release if nonrecourse debt (such as certain mortgage loans) is assumed by a third
party in conjunction with the sale of an asset that serves as sole collateral for that debt.
Pending Content:
Transition Date: (P) December 16, 2017; (N) December 16, 2018
65­1
Transition Guidance: 405­20­
Unless addressed by other guidance (for example, paragraphs 405­20­40­3 through 40­4 or
paragraphs 606­10­55­46 through 55­49), a debtor shall derecognize a liability if and only if it has
been extinguished. A liability has been extinguished if either of the following conditions is met:
a. The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor
includes the following:
1. Delivery of cash
2. Delivery of other financial assets
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405-20-40 Derecognition – Print Friendly
3. Delivery of goods or services
4. Reacquisition by the debtor of its outstanding debt securities whether the securities are
cancelled or held as so­called treasury bonds.
b. The debtor is legally released from being the primary obligor under the liability, either judicially or
by the creditor. For purposes of applying this Subtopic, a sale and related assumption effectively
accomplish a legal release if nonrecourse debt (such as certain mortgage loans) is assumed by a
third party in conjunction with the sale of an asset that serves as sole collateral for that debt.
405­20­40­2 If a creditor releases a debtor from primary obligation on the condition that a third party
assumes the obligation and that the original debtor becomes secondarily liable, that release extinguishes
the original debtor’s liability. However, in those circumstances, whether or not explicit consideration was
paid for that guarantee, the original debtor becomes a guarantor. As a guarantor, it shall recognize a
guarantee obligation in the same manner as would a guarantor that had never been primarily liable to that
creditor, with due regard for the likelihood that the third party will carry out its obligations. The guarantee
obligation shall be initially measured at fair value, and that amount reduces the gain or increases the loss
recognized on extinguishment. See Topic 460 for accounting guidance related to guarantees.
>
Prepaid Stored­Value Products
405­20­40­3
Pending Content:
Transition Date: (P) December 16, 2017; (N) December 16, 2018
65­1
Transition Guidance: 405­20­
Prepaid stored­value products are products in physical and digital forms with stored monetary values
that are issued for the purpose of being commonly accepted as payment for goods or services. While
the holder of a prepaid stored­value product also may be permitted to redeem the product for cash,
prepaid stored­value products do not include products that only can be redeemed by the product
holder for cash (for example, nonrecourse debt, bearer bonds, or trade payables). Examples of prepaid
stored­value products include prepaid gift cards issued on a specific payment network and redeemable
at network­accepting merchant locations, prepaid telecommunication cards, and traveler’s checks. The
derecognition guidance in paragraph 405­20­40­4 does not apply to liabilities related to either of the
following:
a. Prepaid stored­value products (or portions of those products) for which any breakage (that is, the
portion of the dollar value of prepaid stored­value products that ultimately is not redeemed by
product holders for cash or not used to purchase goods and/or services) must be remitted in
accordance with unclaimed property laws
b. Prepaid stored­value products that are attached to a segregated bank account like a customer
depository account.
The guidance also does not apply to customer loyalty programs or transactions within the scope of other
Topics (for example, Topic 606 on revenue from contracts with customers).
405­20­40­4
Pending Content:
Transition Date: (P) December 16, 2017; (N) December 16, 2018
65­1
Transition Guidance: 405­20­
If an entity expects to be entitled to a breakage amount for a liability resulting from the sale of a
prepaid stored­value product in the scope of paragraph 405­20­40­3, the entity shall derecognize the
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amount related to the expected breakage in proportion to the pattern of rights expected to be
exercised by the product holder only to the extent that it is probable that a significant reversal of the
recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to
a breakage amount for prepaid stored­value products in the scope of paragraph 405­20­40­3, the
entity shall derecognize the amount related to breakage when the likelihood of the product holder
exercising its remaining rights becomes remote. At the end of each period, an entity shall update the
estimated breakage amount to represent faithfully the circumstances present at the end of the period
and the changes in circumstances during the period. Changes to an entity’s estimated breakage
amount shall be accounted for as a change in accounting estimate in accordance with paragraphs 250­
10­45­17 through 45­20.
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450-20-25 Recognition – Print Friendly
January 14, 2018
450 Contingencies
20 Loss Contingencies
25 Recognition
General Note: The Recognition Section provides guidance on the required criteria, timing, and location
(within the financial statements) for recording a particular item in the financial statements. Disclosure is
not recognition.
General
>
General Rule
450­20­25­1 When a loss contingency exists, the likelihood that the future event or events will
confirm the loss or impairment of an asset or the incurrence of a liability can range from probable to
remote. As indicated in the definition of contingency, the term loss is used for convenience to include
many charges against income that are commonly referred to as expenses and others that are commonly
referred to as losses. The Contingencies Topic uses the terms probable, reasonably possible, and remote
to identify three areas within that range.
450­20­25­2 An estimated loss from a loss contingency shall be accrued by a charge to income if both of
the following conditions are met:
a. Information available before the financial statements are issued or are available to be issued (as
discussed in Section 855­10­25) indicates that it is probable that an asset had been impaired or a
liability had been incurred at the date of the financial statements. Date of the financial statements
means the end of the most recent accounting period for which financial statements are being
presented. It is implicit in this condition that it must be probable that one or more future events will
occur confirming the fact of the loss.
b. The amount of loss can be reasonably estimated.
The purpose of those conditions is to require accrual of losses when they are reasonably estimable and
relate to the current or a prior period. Paragraphs 450­20­55­1 through 55­17 and Examples 1–2 (see
paragraphs 450­20­55­18 through 55­35) illustrate the application of the conditions. As discussed in
paragraph 450­20­50­5, disclosure is preferable to accrual when a reasonable estimate of loss cannot be
made. Further, even losses that are reasonably estimable shall not be accrued if it is not probable that an
asset has been impaired or a liability has been incurred at the date of an entity’s financial statements
because those losses relate to a future period rather than the current or a prior period. Attribution of a loss
to events or activities of the current or prior periods is an element of asset impairment or liability
incurrence.
>
Assessing Probability of Incurrence of a Loss
450­20­25­3 The conditions in the preceding paragraph are not intended to be so rigid that they require
virtual certainty before a loss is accrued. Instead, the condition in (a) in the preceding paragraph is
intended to proscribe accrual of losses that relate to future periods.
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>
450-20-25 Recognition – Print Friendly
Assessing Whether a Loss Is Reasonably Estimable
450­20­25­4 The condition in paragraph 450­20­25­2(b) is intended to prevent accrual in the financial
statements of amounts so uncertain as to impair the integrity of those statements.
450­20­25­5 That requirement shall not delay accrual of a loss until only a single amount can be
reasonably estimated. To the contrary, when the condition in paragraph 450­20­25­2(a) is met and
information available indicates that the estimated amount of loss is within a range of amounts, it follows
that some amount of loss has occurred and can be reasonably estimated. Thus, when the condition in
paragraph 450­20­25­2(a) is met with respect to a particular loss contingency and the reasonable estimate
of the loss is a range, the condition in paragraph 450­20­25­2(b) is met and an amount shall be accrued
for the loss.
>
Events After the Date of the Financial Statements
450­20­25­6 After the date of an entity’s financial statements but before those financial statements are
issued or are available to be issued (as discussed in Section 855­10­25), information may become
available indicating that an asset was impaired or a liability was incurred after the date of the financial
statements or that there is at least a reasonable possibility that an asset was impaired or a liability was
incurred after that date. The information may relate to a loss contingency that existed at the date of the
financial statements, for example, an asset that was not insured at the date of the financial statements. On
the other hand, the information may relate to a loss contingency that did not exist at the date of the
financial statements, for example, threat of expropriation of assets after the date of the financial
statements or the filing for bankruptcy by an entity whose debt was guaranteed after the date of the
financial statements. In none of the cases cited in this paragraph was an asset impaired or a liability
incurred at the date of the financial statements, and the condition for accrual in paragraph 450­20­25­2(a)
is, therefore, not met.
450­20­25­7 If a loss cannot be accrued in the period when it is probable that an asset had been
impaired or a liability had been incurred because the amount of loss cannot be reasonably estimated, the
loss shall be charged to the income of the period in which the loss can be reasonably estimated and shall
not be charged retroactively to an earlier period. All estimated losses for loss contingencies shall be
charged to income rather than charging some to income and others to retained earnings as prior period
adjustments.
>
Business Risks
450­20­25­8 General or unspecified business risks do not meet the conditions for accrual in paragraph
450­20­25­2, and no accrual for loss shall be made.
Securities and Exchange Commission (SEC)
General Note: The Recognition Section provides guidance on the required criteria, timing, and
location (within the financial statements) for recording a particular item in the financial statements.
Disclosure is not recognition.
General
>
Accounting for Legal Costs
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450­20­S25­1 See paragraph 450­20­S99­2, SEC Staff Announcement: Accounting for Legal Costs
Expected to Be Incurred in Connection with a Loss Contingency, for SEC Staff views on the recognition
of such costs.
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450-20-55 Implementation Guidance and Illustrations – Print Friendly
January 14, 2018
450 Contingencies
20 Loss Contingencies
55 Implementation Guidance and Illustrations
General Note: The Implementation Guidance and Illustrations Section contains implementation guidance
and illustrations that are an integral part of the Subtopic. The implementation guidance and illustrations
do not address all possible variations. Users must consider carefully the actual facts and circumstances in
relation to the requirements of the Subtopic.
General
>
Implementation Guidance
450­20­55­1 This Section includes implementation guidance for the application of the conditions for
accrual of loss contingencies and for the disclosure requirements of this Subtopic. This guidance does not
address all possible applications of the requirements of this Subtopic. Therefore, accrual and disclosure of
loss contingencies should be based on an evaluation of the facts and circumstances in each particular
situation.
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Injury or Damage Caused by Products Sold
450­20­55­2 If it is probable that a claim resulting from injury or damage caused by a product defect
will arise with respect to products or services that have been sold, accrual for losses may be appropriate.
The condition in paragraph 450­20­25­2(a) would be met, for instance, with respect to a drug product or
toys that have been sold if a health or safety hazard related to those products is discovered and as a result
it is considered probable that liabilities have been incurred. The condition in paragraph 450­20­25­2(b)
would be met if experience or other information enables the entity to make a reasonable estimate of the
loss with respect to the drug product or the toys.
>>
Risk of Loss or Damage of Property
450­20­55­3 At the date of an entity’s financial statements, it may not be insured against risk of future
loss or damage to its property by fire, explosion, or other hazards. Some risks, for all practical purposes,
may be noninsurable, and the self­assumption of those risks is mandatory.
450­20­55­4 The absence of insurance against losses from risks of those types constitutes an existing
condition involving uncertainty about the amount and timing of any losses that may occur, in which case a
loss contingency exists. Uninsured risks may arise in a number of ways, including the following:
a. Noninsurance of certain risks
b. Co­insurance or deductible clauses in an insurance contract
c. Insurance through a subsidiary or investee to the extent not reinsured with an independent insurer.
(The effects of transactions between a parent or other investor and a subsidiary or investee insurance
entity shall be eliminated from an entity’s financial statements in accordance with paragraphs 810­10­
45­1 and 323­10­35­7.)
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450­20­55­5 The absence of insurance does not mean that an asset has been impaired or a liability has
been incurred at the date of an entity’s financial statements. Fires, explosions, and other similar events
that may cause loss or damage of an entity’s property are random in their occurrence. With respect to
events of that type, the condition in paragraph 450­20­25­2(a) is not satisfied prior to the occurrence of
the event because until that time there is no diminution in the value of the property. There is no
relationship of those events to the activities of the entity prior to their occurrence, and no asset is impaired
prior to their occurrence. Further, unlike an insurance entity, which has a contractual obligation under
policies in force to reimburse insureds for losses, an entity can have no such obligation to itself and, hence,
no liability.
>>
Risk of Loss from Future Events
450­20­55­6 An entity may choose not to purchase insurance against risk of loss that may result from
injury to others, damage to the property of others, or interruption of its business operations. Exposure to
risks of those types constitutes an existing condition involving uncertainty about the amount and timing of
any losses that may occur, in which case a contingency exists.
450­20­55­7 Mere exposure to risks of those types, however, does not mean that an asset has been
impaired or a liability has been incurred. The condition in paragraph 450­20­25­2(a) is not met with
respect to loss that may result from injury to others, damage to the property of others, or business
interruption that may occur after the date of an entity’s financial statements. Losses of those types do not
relate to the current or a prior period but rather to the future period in which they occur. Thus, for
example, an entity with a fleet of vehicles should not accrue for injury to others or damage to the property
of others that might be caused by those vehicles in the future even if the amount of those losses may be
reasonably estimable.
450­20­55­8 On the other hand, the conditions in paragraph 450­20­25­2 would be met with respect to
uninsured losses resulting from injury to others or damage to the property of others if both of the following
are true:
a. The event took place prior to the date of the financial statements, even though the entity may not
become aware of those matters until after that date.
b. The experience of the entity or other information enables it to make a reasonable estimate of the
loss that was incurred prior to the date of its financial statements.
Injury or damage resulting from products that have been sold are discussed in paragraph 450­20­55­2.
>>
Threat of Expropriation
450­20­55­9 The threat of expropriation of assets is a contingency (as defined) because of the
uncertainty about its outcome and effect. The condition in paragraph 450­20­25­2(a) is met if both of the
following are true:
a. Expropriation is imminent.
b. Compensation will be less than the carrying amount of the assets.
Imminence may be indicated, for example, by public or private declarations of intent by a government to
expropriate assets of the entity or actual expropriation of assets of other entities. The condition in
paragraph 450­20­25­2(b) requires that accrual be made only if the amount of loss can be reasonably
estimated. If the conditions for accrual are not met, the disclosures described in paragraphs 450­20­50­3
through 50­8 would be made if there is at least a reasonable possibility that an asset has been impaired.
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Litigation, Claims, and Assessments
450­20­55­10 The following factors should be considered in determining whether accrual and/or
disclosure is required with respect to pending or threatened litigation and actual or possible claims and
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