When faced with lawsuits, many companies recognize a loss and therefore credit a liability or reserve account for any future losses that may result. For instance, in the famous WorldCom case, Citibank, one of the world’s largest financial services firms, announced it was setting up reserves or liabilities of $5.6 billion because of pending lawsuits due to its relationship with WorldCom.14 Were these pending lawsuits contingent liabilities? According to the FASB, what conditions must exist before a liability related to a pending lawsuit can be entered in the accounting records?
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