What is Extreme Art Studio's policy regarding the disclosure of loss contingencies considered 'remote'?
Extreme_Art_Studio Franchise · 2024 FDDAnswer from 2024 FDD Document
or cash equivalents.
(2) Commitments and Contingencies
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 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
NOTES TO THE FINANCIAL STATEMENTS December 31, 2023
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 49)
What This Means (2024 FDD)
According to the 2024 FDD, Extreme Art Studio does not account for or disclose loss contingencies considered 'remote'. The FDD states that the company adheres to the guidelines in ASC 450, Contingencies, for accounting of legal matters and other contingencies.
Loss contingencies are assessed based on the likelihood of a liability occurring. If a loss contingency is 'probable' and the amount can be reasonably estimated, it is accrued. If 'probable' but not reasonably estimable, it is disclosed. If 'reasonably possible', disclosure is made, including the potential range of loss if determinable.
For a prospective Extreme Art Studio franchisee, this means that the company only discloses potential losses that are deemed likely or reasonably possible. Remote possibilities of losses are not disclosed, which could potentially hide some risks. However, management believes that any unfavorable outcomes would not have a material effect on the company's financial position.