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.
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