What is the underlying concept that supports the immediate recognition of a contingent loss?
a. Consistency.
b. Substance over form.
c. Conservatism.
d. Matching.
Explanation
Choice "c" is correct. Conservatism is a prudent reaction to uncertainty to try to ensure that uncertainty and risks inherent in business situations are adequately considered. Recognition of a contingent loss is the recording of an amount representing uncertainty and risk in a business situation.
Choice "b" is incorrect. The substance over form concept presumes that the transaction form may not dictate the accounting treatment.
Choice "a" is incorrect. Consistency is conformity from period to period with unchanging policies and procedures.
Choice "d" is incorrect. The matching principle dictates that expenses be matched with the related revenues generated or the time period in which the expense is incurred and known. SFAS #5 cites matching as the one concept supporting the immediate recognition of a contingent loss, but it is not the primary underlying concept.
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