What action does Devon Creek take regarding loss contingencies that are considered 'remote'?
Devon_Creek Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company may be subject to various claims, legal actions and complaints arising in the ordinary course of business. In accounting for legal matters and other contingencies, the Company follows the guidance in ASC Topic 450 Contingencies, under which loss contingencies are accounted for based upon the likelihood of incurrence of a liability. If a loss contingency is "probable" and the amount of loss can be reasonably estimated, it is accrued. If a loss contingency is "probable" but the amount of loss cannot be reasonably estimated, disclosure is made. If a loss contingency is "reasonably possible," disclosure is made, including the potential range of loss, if determinable. Loss contingencies that are "remote" are neither accounted for nor disclosed.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 45)
What This Means (2024 FDD)
According to the 2024 FDD, Devon Creek does not account for or disclose loss contingencies that are considered "remote". This policy is based on ASC Topic 450 Contingencies, which guides how Devon Creek accounts for potential legal matters and other contingencies.
For a prospective Devon Creek franchisee, this means that the company does not set aside reserves or provide specific disclosures in its financial statements for potential losses deemed unlikely to occur. This approach is standard accounting practice, as it prevents the company from overstating potential liabilities and ensures that financial statements accurately reflect the company's financial position.
It's important to note that Devon Creek does account for and disclose loss contingencies that are either "probable" or "reasonably possible." If a loss is deemed probable and can be reasonably estimated, Devon Creek will accrue the amount. If probable but not reasonably estimable, or reasonably possible, Devon Creek will disclose the contingency, including the potential range of loss if it can be determined. This ensures that while remote risks are not specifically addressed, more significant potential liabilities are appropriately managed and disclosed.