Dudley B. and La Donna K. Merkel - Page 25

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          that:  “Under Generally Accepted Accounting Principles [GAAP],              
          true contingent liabilities are merely disclosed in the footnotes           
          to the financial statements as petitioner Hepburn did in this               
          case, rather than accrued in the statements as a liability.  See            
          FASB Statement No. 5”.                                                      
               FASB establishes and improves standards of financial                   
          accounting and reporting for the guidance and education of the              
          public, including issuers, auditors, and users of financial                 
          statements.  Kay & Searfoss, Handbook of Accounting and                     
          Auditing 46-8 (2d ed. 1989).  Respondent directs our attention to           
          FASB Statement of Financial Accounting Standards No. 5,                     
          Accounting for Contingencies (FASB Statement No. 5).  By FASB               
          Statement No. 5, FASB establishes standards of financial                    
          accounting and reporting for “loss contingencies”, which term is            
          defined to mean, in general, a situation of possible loss that              
          will be resolved in the future, see FASB Statement No. 5, par. 1.           
          The likelihood of a loss can range from “probable” to “remote”.             
          Id. at par. 3.  The estimated loss associated with a liability              
          must be accrued by a charge to income (which would result in a              
          balance sheet liability) if both (1) information indicates that             
          it is probable that the liability has been incurred and (2) the             
          amount of the loss can be reasonably estimated.  Id. at par. 8.13           

          13   Guarantees are specifically included in the examples of loss           
          contingencies contained in FASB Statement No. 5.  FASB Statement            
          No. 5., par. 4.h. (“Guarantees of indebtedness of others”).  The            
          current practice under Generally Accepted Accounting Principles             
                                                             (continued...)           



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