Probable Losses

See Also:
Accounting Principles
Subsequent Events
Business Segments
Accounting Changes

Probable Losses Definition

Probable losses disclosure or the disclosure of loss contingencies is usually a concern for ongoing litigation proceedings or perhaps the discontinuance of an operation that will likely see a loss when it is sold. This form of probable accounting falls under the disclosure principle which states that a company must report a probable loss before it occurs if the amount can be readily estimated and it is likely the event will happen.

Probable Losses Example

Case Entertainment Co. has a business line that makes VHS systems. However, technology has reached a point where VHS systems have become obsolete to the new DVD disc players which is another line which Casa Entertainment owns. Looking to future Casa has decided that it would like to discontinue the VHS operations which have begun to show losses and expand the profitable DVD operations. Casa has had the plant and its operation equipment appraised as it gets ready to dispose of the line. After appraisal the company has shown that it will see a loss on the disposal of the assets of $125 million. The discontinuance of the operations net of taxes has shown that the company will post a further loss of $5 million. The income from continuing operations will be $400 million. Therefore the Casa should show the following on the bottom of it’s income statement.

Income from continuing operations……………………………$400 million
Discontinued Operations:
Loss from operation…………………………………………………… $(5 million)
Loss on Disposal………………………………………………………… $(125 million)
Net Income ………………………………………………………………….$270 million

Note: The following was most likely accrued for over the year or since the decision was made to discontinue the operation.

Probable Losses

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