Contingencies and Commitments
A contingency is an existing condition involving uncertainty about possible gain or loss that will be resolved when future events occur, accounted for under ASC 450.
Explanation
Loss contingencies are accrued (recognized as a liability and expense) when the loss is probable and the amount can be reasonably estimated. If the loss is reasonably possible but not probable, or if probable but not estimable, disclosure is required in the notes but no accrual is made. Remote loss contingencies generally require no disclosure, with the exception of guarantees.
Gain contingencies are never accrued — they are disclosed only when realization is probable. This conservatism principle prevents premature recognition of uncertain gains. Commitments, such as purchase obligations or noncancelable operating leases, are disclosed in the notes when they represent significant future obligations.
Key Points
- •Accrue loss when probable AND reasonably estimable
- •Disclose when reasonably possible (or probable but not estimable)
- •Gain contingencies are disclosed only when probable, never accrued
- •Use the low end of a range if no amount is more likely than any other
Exam Tip
The probable/reasonably possible/remote framework is frequently tested. Remember to accrue the low end of a range when no single amount is the best estimate.
Frequently Asked Questions
Related Topics
Subsequent Events
Subsequent events are events occurring after the balance sheet date but before financial statements are issued (or available to be issued), classified as recognized (Type I) or nonrecognized (Type II).
Balance Sheet (Statement of Financial Position)
The balance sheet reports an entity's assets, liabilities, and equity at a specific point in time, following the fundamental accounting equation: Assets = Liabilities + Equity.
Audit Evidence
Audit evidence is all information used by the auditor to arrive at the conclusions on which the audit opinion is based, evaluated for sufficiency (quantity) and appropriateness (quality).
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