FAR, Financial Accounting and Reporting
Sources for Contingencies
Last reviewed
The standards and authorities behind PocketCPA's FAR lessons on Contingencies. The topic rests on ASC 450.
About this topic
A contingency is a maybe. Something has already happened, and its consequence is not settled yet.
More precisely, a contingency is an existing condition, situation, or set of circumstances involving uncertainty that will be resolved only when some future event occurs or fails to occur. Managing that uncertainty is the whole job of ASC 450.
Key points
- A loss contingency is accrued when the loss is probable and the amount is reasonably estimable.
- When a range of loss is equally likely, the minimum of the range is accrued under U.S. GAAP.
- Gain contingencies are not recognized until realized; they are disclosed only when realization is probable.
- Litigation settlements are recognized based on when the underlying events occurred, not when the settlement is reached.
What the lessons cover
- The likelihood scale: probable, reasonably possible, remote (ASC 450-20-25-1)
- Accruing a loss contingency: the two-part test (ASC 450-20-25-2)
- Measuring the loss: single estimates and ranges (ASC 450-20-30-1)
- Warranties: the everyday loss contingency
- Litigation, asserted and unasserted claims (ASC 450-20-50-6)
- Gain contingencies (ASC 450-30-25-1)
- Disclosure and the decision matrix (ASC 450-20-50)
- Commitments: disclosed, not recognized (ASC 440)
Authoritative references
- ASC 450-20-25-1, the likelihood scale: probable, reasonably possible, and remote.
- ASC 450-20-25-2, the two-part accrual test: a loss that is probable and reasonably estimable.
- ASC 450-20-25-3, probable is a high bar but does not demand virtual certainty.
- ASC 450-20-30-1, the amount accrued: the best estimate within a range, or the minimum where no point is better.
- ASC 450-20-45, an appropriation of retained earnings, to which no loss may be charged and which may never be transferred to income.
- ASC 450-20-50, the disclosure requirements and the decision matrix.
- ASC 450-20-50-1, descriptive terminology for the accrual, such as estimated liability, and the discouragement of the word reserve.
- ASC 450-20-50-3 through 50-5, disclosure of a reasonably possible loss: the nature of the contingency and either an estimate or range of the possible loss or a statement that it cannot be made, and disclosure in place of accrual.
- ASC 450-20-50-6, litigation and asserted and unasserted claims.
- ASC 450-20-S99-1, the SEC staff presumption keyed to a party asserting that it is not liable (SAB Topic 5.Y).
- ASC 450-30-25-1 and 450-30-50-1, a gain contingency that waits for realization, and the disclosure worded to avoid implying that realization is certain.
Related requirements outside the Topic:
- Environmental remediation, ASC 410-30-35-8 and 35-9, on recovery measured independently and the presumption against realization once a claim is litigated.
- Change in accounting estimate, ASC 250-10-45-17.
- Offsetting, ASC 210-20-45-1.
- Commitments, ASC 440-10-50-1 for general commitments, 50-2 for the three characteristics of an unconditional purchase obligation, and 50-4 and 50-6 for its disclosure when unrecognized and when recognized. ASC 505-10-50-5 covers dividends in arrears and ASC 330-10-35-17 a loss on a firm purchase commitment.
- Subsequent events, ASC 855-10-25-1 and 25-3.
- Uncertain tax positions, ASC 740-10-25-6.
- Guarantees, ASC 460.
How PocketCPA uses these sources
Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.