How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask taxmanrog Your Own Question

taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 392
Experience:  Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
74656765
Type Your Tax Question Here...
taxmanrog is online now
A new question is answered every 9 seconds

Can you help me explain the impact of contingent liabilities

Resolved Question:

Can you help me explain the impact of contingent liabilities on ASC 740 (accounting for income taxes)?
Submitted: 1 year ago.
Category: Tax
Expert:  taxmanrog replied 1 year ago.
Hi! Welcome to Just Answers! Thanks for the chance to answer your question! I will be happy to help as best I can!

A contingent liability is one that has not yet met the all events test. In order to better answer this question, what is the type of contingent liability that you have in mind? It makes a difference, as the IRS has issued a couple of Rev Procs for different situations.

Thanks! I look forward to your reply!

Roger
Customer: replied 1 year ago.

We bought a company for $5million, asset purchase, and included in the agreement was a $1million contingent liability, payable to seller if certain thresholds are met by the newly acquired company, in installment of 5 years. How should we record for tax provision purpose the contingent liability at the date of purchase? What if the liability paid is only $500K?

Expert:  taxmanrog replied 1 year ago.
OK. Contingent liabilities resulting from a purchase.

First, FASB ASC 740–10–25: Income Taxes–Overall–Recognition (previously “Accounting for Uncertainty in Income Taxes,” FASB Interpretation No. 48 (Norwalk, Conn.: FASB, 2006)) provides guidance on accounting for uncertainty in income taxes. FASB ASC 450–10: Contingencies–Loss Contingencies (previously SFAS No. 5) no longer applies to income taxes. GAAP regarding uncertainty in income taxes changes the threshold for recognition of tax positions from the most probable amount to the amount that has a “more likely than not” chance of being sustained upon examination. There are several more FASB that talk about calculating amounts for estimates, i.e., using present value of probable future cash flows.

ASC Glossary defines a contingency as “an existing condition, situation, or set of circumstances
involving uncertainty as to possible gain or loss to an entity that will ultimately be resolved when one or more future events occurs or fails to occur.” Under ASC 450, contingencies would be recognized as follows:

- Contingencies that might result in gains usually are not recognized as assets, since doing so might result in recognizing revenue before realization

- A loss contingency liability is recognized when the amount of loss can be reasonably estimated and it is probably that

- An asset has been impaired or a liability has been incurred

- Future events will occur confirming the loss.

However, the recognition and measurement guidance in ASC 450 does not apply to the acquisition date accounting for contingencies in a business combination. Instead, ASC 805 provides new measurement and recognition guidance for assets and liabilities arising from contingencies, a new term that is more descriptive of the new accounting requirements for business combinations.

ASC 805-20-25-19 requires a new approach for recognizing an asset or liability arising from a contingency and establishes different recognition thresholds for contractual and non contractual contingencies, as follows:

Contractual contingencies: Assets and liabilities that arise from acquired contingencies related to contracts are recognized at fair value on the acquisition date.

Non contractual contingencies: For all other (non contractual) contingencies, the acquirer recognizes the asset or liability only if it is more likely than not that the contingency gives rise to an asset or liability, as defined in Concepts Statement 6, as of the acquisition date. For example, a liability arising from a noncontractual contingency would be recognized as part of the business combination if, as of the acquisition date, it is more likely than not that the entity has incurred a present obligation to pay if a specified contingent event occurs. The probability that the entity will incur a gain or loss if the contingent event occurs would be reflected in the measurement of the fair value of the asset or liability to be recognized.

So, in your case, you have an contractual acquisition liability. So you would have to value the contingent liability at a fair value as of the date of acquisition, using an amount that would have a "more likely than not" chance of being sustained on examination, in other words, a conservative amount.

I hope this answers your questions! If not, I would be happy to help answer any more that you have! Just ask away! If this answer has helped you, please rate me highly! I would appreciate it!

Thanks! Have a good week!

Customer: replied 1 year ago.

So, for ASC 740 the liabilities are recorded at fair value, but for tax purpose the liabilities are not recorded because it is not fixed, yet. So, we created a deferred tax at acquisition date because of this difference? what if the amount paid is different than $1million?

Expert:  taxmanrog replied 1 year ago.
You are correct. As far as the amount to record, you need to record it at your best estimate of the difference. I would use the number that is most likely to be correct. For example, if in a perfect world you would have to pay $1million, but there is an 85% chance that it will be $650k will be the final payment, I would book the $650k. Any adjustment can be made in year 5, as the All Events test would be satisfied at that point.

I hope this answers your questions! If not, I would be happy to help answer any more that you have! Just ask away! If this answer has helped you, please rate me highly! I would appreciate it!

Thanks! Have a good week!

taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 392
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
taxmanrog and 9 other Tax Specialists are ready to help you

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
  • http://ww2.justanswer.com/uploads/CU/Cuttinggirl/2011-10-29_03719_wcrop2.64x64.jpg Wendy Reed's Avatar

    Wendy Reed

    Enrolled Agent

    Satisfied Customers:

    3052
    15+ years tax preparation and tax advice.
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    985
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3229
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    6121
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2783
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/OZ/ozaukeecpa/2012-6-7_193219_Picture1croppedandshrunk.64x64.jpg MequonCPA's Avatar

    MequonCPA

    Certified Public Accountant (CPA)

    Satisfied Customers:

    2231
    CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.