What is Loss contingency?
In short
A loss contingency is an existing condition, such as a lawsuit or a guarantee, whose outcome depends on a future event. It is accrued if a loss is probable and can be reasonably estimated, and disclosed if a loss is reasonably possible.
Key takeaways
- If a range is estimated, accrue the best estimate in the range or, if none is better, the minimum.
- Remote losses usually need neither accrual nor disclosure (guarantees are an exception).
- Gain contingencies are never accrued.
Example
A probable lawsuit loss estimated at $50,000 to $80,000, with no best estimate, is accrued at $50,000 and the possible extra $30,000 is disclosed.
Where it's tested
FAR: Current Liabilities, Contingencies & Commitments — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A loss contingency is probable and estimated within a range of $200,000 to $500,000, with no amount in the range a better estimate than any other. Under US GAAP, what amount is accrued?