Accounting contingencies and commitments

They are generically called Contingent Liabilities and they are the obligations that are subject to the realization of a fact, for which they disappear or become real liabilities, for example, lawsuits, third-party claims in relation to products sold to them, guarantees, guarantees, costs of pension plans, retirements, severance payments, etc.

There are contingencies that it is not necessary to recognize in the Financial Statements and that are inherent to business operations and affect many companies, if not all, such as:

The possibilities of strike. Expropriation. Business recession. Closing of companies that affect the economic entity. War.

CONTINGENCY:

According to the Commission of Generally Accepted Accounting Principles (Bulletin C-12), in the normal course of its operations every company carries out a multitude of transactions or is affected by external economic events, about which there is greater uncertainty. or lesser degree, regarding its final result.

This uncertainty or risk inherent in transactions and events that affect an entity is denoted in accounting by the word Contingency, which has been defined as a condition, situation or set of circumstances that involve a certain degree of uncertainty that may result from the consummation of a fact, in the acquisition or loss of an asset or in the origin or cancellation of a liability that generally results in a profit or loss.

The Accounting Principles Commission classifies contingencies into 2 groups:

Those of a repetitive nature. Those of an isolated nature.

Those of a repetitive nature that can be measured, reasonably approximated as a whole through experience and / or the empirical or statistically established probability of its occurrence.

As an example of these contingencies, we can mention by way of example but not limitation, the following:

Unrecoverability of accounts receivable. Obsolescence and slow movement of inventories. Product service guarantee. Probable cost assignable to each exercise of pension plans. Seniority premiums and other deferred benefits granted to personnel, subject to the fulfillment of a condition future.

Probable effect assignable to each income tax exercise and employee participation in the profits whose payment refers or is anticipated by virtue of offset differences between taxable profit and accounting profit before this tax.

Granting of guarantees for endorsement and / or discount of documents receivable.

Those of an isolated nature.

In which, at a given moment, there are elements of judgment, estimation or opinion that allow the probable result to be measured within the reasonable limit.

The most common examples of this type of contingencies are:

Tax claims and other matters of a similar nature whose probable result can be reasonably estimated based on the best judgment of the Company's Management and its qualified advisers.

Commitment.

According to the Generally Accepted Accounting Principles Commission (IMCP), accounting has been defined as an obligation evidenced through a contract or purchase order signed with a third party.

Sometimes certain situations or transactions are incorrectly described as a contingency, because it may have a certain degree of uncertainty, which is the essential characteristic of a contingency, as examples we can cite: letters of credit granted, long-term leases, assets given in guarantee of loans, commitments such as the acquisition of fixed assets, the obligation to reduce liabilities, the obligation to maintain a certain working capital, etc.

Even though these situations may eventually turn into contingencies, they should not be described as such, if not until that moment in which that eventuality occurs, meanwhile they only represent acquired commitments.

The repetitive contingencies that have been mentioned previously are:

Unrecoverability of accounts receivable. Obsolescence and slow movement of inventories. Product service guarantee, pension plans, retirement and seniority premiums for retirement, severance pay and premiums for separation or death, deferred taxes and deferred participation to workers, granting of guarantees for endorsement and / or discounts of documents receivable that will be treated below:

Unrecoverability of accounts receivable.

It will be treated as a provision for doubtful accounts, taking into account the principle of realization, a provision must be established that covers the losses that are going to be correctly faced in the income statement, the income against cats and costs that are relative.

Obsolescence and slow inventory movement.

The provision for low-movement and obsolete inventories must be recorded to recognize in the results a sufficient loss to cover that which will occur on the date of sale or consumption.

Product service guarantee.

The product service guarantee is usual in the marketing of many products, mainly the so-called durable ones, which have a useful life of several years, such as household appliances: washing machines, refrigerators, blenders, automobiles, machines, tools, etc.

Another line of products that guarantee their quality are watches, electronic products such as televisions, sound devices, recorders, etc.

The provision is established to recognize in the results of the economic entity the possible claims that will be made for the failure or breakdown of the products sold.The calculation to establish the amount must be provisioned taking into account the characteristics of the market, its methods of sales and mainly the experience that has been had in previous exercises.

The provision is generally calculated establishing a percentage on the sale based mainly on the experience obtained in a similar way to the provision for doubtful accounts.

Accounting Record of Provision for doubtful accounts.

Monthly Seat:

Concept	Partial	Should	To have
Administration expenses.		XXX
Doubtful accounts.	XXX
Provision for doubtful accounts.			XXX
Provision of the year.	XXX

= Increase in the provision for the month for doubtful accounts.

When the accounts are considered uncollectible, the provision is charged:

Concept	Partial	Should	To have
Provision for doubtful accounts.		XXX
Bad accounts	XXX
Accounts receivable - Clients			XXX
Individual customer account	XXX

= Cancellation of customer X account that is considered uncollectible.

When the debtor liquidates your account or part of it after it has been canceled as uncollectible.

Concept	Partial	Should	To have.
Accounts receivable- clients		XXX
Individual customer account.	XXX
Provision for doubtful accounts.			XXX
Bad accounts	XXX

= Recovery of customer account X which was considered uncollectible on that date: XXXXXX

Accounting Record of the Provision for slow moving and obsolete inventories.

Concept	Partial	Should	To have
Selling Expenses		XXX
Slow moving and outdated inventories.	XXX
Manufacturing expenses.		XXX
Slow moving and outdated inventories.	XXX
Provision for slow moving and obsolete inventories.			XXX
Inventory subaccount type.	XXX