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If a loss contingency is remote, but the relationship is with a related party, does the loss contingency need to be disclosed?

Yes. Under U.S. GAAP, if the loss contingency is remote and immaterial, then a company is not required to disclose the item in the financial statements.

However, since the loss contingency is with a related party, the item does need to be disclosed. U.S. GAAP requires all transactions with related parties to be disclosed, regardless of materiality.

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  • Is a company required to disclose related party transactions?

    Yes, absolutely. If a company has a related party transaction, then the company is required to disclose the nature of the relationship in the financial statements. Other additional disclosures that are required include concentration of credit risk and contingencies.

  • When recording a loss contingency on the balance sheet, and I have a range of possible outcomes, what estimate should I go with?

    As long as the loss contingency is probable, and the loss can be reasonably estimated, you should always go with the lowest number on the range.

  • What is the journal entry to record a contingent liability?

    Assuming that the loss contingency is “probable” and can be reasonably estimated, then a journal entry should be recorded to accrue the liability. The journal entry would be to debit legal expense and credit to record the legal liability.