If a loss contingency for Kidokinetics is considered 'reasonably possible', what disclosure is required in the financial statements?
Kidokinetics 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 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.
In the opinion of management, all matters are of such kind, or involving such amounts of unfavorable disposition, if any, would not have a material effect on the financial position of the Company.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 59)
What This Means (2024 FDD)
According to Kidokinetics's 2024 Franchise Disclosure Document, the company adheres to ASC 450, Contingencies, for accounting of legal matters and other contingencies. If a loss contingency is deemed 'reasonably possible,' Kidokinetics is required to make a disclosure in its financial statements. This disclosure should include the potential range of the loss, if that range can be determined.
This means that if Kidokinetics faces a situation where a loss is reasonably possible (more than remote but less than probable), the financial statements must acknowledge this potential loss. The disclosure aims to inform potential investors and franchisees about risks that could impact the company's financial health.
For a prospective Kidokinetics franchisee, this is important because it provides insight into the potential financial risks the company faces. Understanding these contingencies can help a franchisee assess the stability and potential liabilities of the franchise, aiding in their decision-making process. It is important to note that management believes that any unfavorable outcomes would not have a material effect on the company's financial position.