Expected cash flow approach

• What happens when a warranty obligation spans more than one year?

• What happens when we don't have a solid estimate of a warranty obligation, but instead have multiple possible outcomes (each with their own associated probability)?

• The answer is to use the expected cash flow approach, which is a methodology specified under Statement of Financial Accounting Concepts No. 7 (GAAP).

Extended warranty contracts

An extended warranty contract (also discussed in Intermediate I) provides warranty protection beyond the manufacturer's original warranty.

Litigation claims

Accrual of a loss from pending or ongoing litigation is rare. Instead companies:

• Accrue estimated lawyer fees and legal costs;

• accrue an estimated loss after the ultimate settlement has been reached or negotiations for settlement are substantially completed;

• prepare a disclosure note.

Subsequent events

When the cause of a loss contingency occurs before the year-end, a clarifying event before the financial statements are issued can be used to determine how the contingency is reported.

If an event giving rise to a contingency occurs after the year-end, a liability should not be accrued.

Unasserted claims and assessments

An unasserted claim or assessment is a potential claim that has not yet been made. Some of these claims may require an accrual or the disclosure of a contingent liability.

An example of this would be a trucking company that transports hazardous waste and is subject to environmental laws. Management of the company may be aware of several sites where the company might be liable for cleaning up contamination, but no penalties have been assessed yet.

There is a two-step process in deciding how an unasserted claim should be reported.

Step 1: Is it probable that a claim will be asserted? If NO, stop. If YES, go to step 2.

Step 2: Treat the claim as if it had been asserted and evaluate based on grid above.