Loss contingencies: three thresholds
| Likelihood | Treatment |
|---|---|
| Probable, and reasonably estimable | Accrue a liability |
| Probable, but not estimable — or reasonably possible | Disclose only |
| Remote | No accrual, generally no disclosure |
IMPORTANT: When a loss is probable and estimable only as a range, accrue the best estimate within the range; if no amount in the range is a better estimate than any other, accrue the minimum of the range (and disclose the potential for additional loss).
Gain contingencies
Treated asymmetrically — gain contingencies are never accrued before realized, even if probable, to avoid recognizing income prematurely. They may be disclosed, with care not to imply the gain is assured.
Warranties
Assurance-type warranties (a promise the product will work as intended) are accrued as an expense and liability at the time of sale, estimated based on historical claims experience. Service-type warranties (extended, separately priced) are a distinct performance obligation under ASC 606, with revenue recognized over the warranty period.
EXAM TIP: Compensated absences (vacation pay) are accrued if the obligation relates to services already rendered, the right vests or accumulates, payment is probable, and the amount is reasonably estimable.