Definition
Under ASC 450-20, a loss contingency, such as litigation, product warranties, guarantees, or environmental claims, is accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. If a range is estimable and no amount is better than another, the minimum is accrued. If the loss is reasonably possible, the nature and an estimate of the possible loss (or a statement that it cannot be estimated) is disclosed. Remote contingencies generally require no accrual or disclosure. Gain contingencies are not recognized until realized.
Why it matters in an audit or review
Auditors send legal letters, read board minutes and contracts, and evaluate management's assessment. Subsequent events can provide information about conditions at the balance sheet date.
Example
(Illustrative) A customer sues for $800,000. Counsel believes a loss is probable, in a range of $200,000 to $350,000, with no best estimate.
Dr Litigation expense 200,000 Cr Accrued litigation 200,000
The additional exposure up to $350,000 is disclosed.
Common mistakes
- Accruing the top of the range.
- Omitting disclosure of reasonably possible losses.
Sources
- FASB ASC 450-20-25 (recognition), 450-20-30 (initial measurement, including the minimum of a range) and 450-20-50 (disclosure)
- FASB ASC 450-30 (gain contingencies)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error