Accounting for Contingencies: Closing the Gap Between U.S. GAAP and IFRS with Simulation

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Abstract

Accounting for contingencies differs in certain respects between U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). The two standards on contingencies are similar in principle but different in detail, what may result in significantly different contingent losses reported in the financial statements. The two standards have not been converged.
This paper introduces an idea of applying simulation to deal with uncertainty in determining the amount of provision/contingent loss when there is a range of outcomes which are equally likely. Standard and simulation solutions to a multi-year case scenario are provided and compared under both U.S. GAAP and IFRS. It is concluded that the simulation improves the estimation process and could be used to bridge the gap between U.S. GAAP and IFRS outcomes.

Author

• Sylwia Gornik-Tomaszewski, St. John's University