Loss Contingencies: Accrue, Disclose, or Nothing?
Use two questions: how likely is the loss, and can the amount be reasonably estimated?
Probable and estimable
If a loss is probable and reasonably estimable under the applicable rules, the loss is generally accrued. Disclosure may also be necessary.
Probable but not estimable
When the loss is probable but cannot be reasonably estimated, disclosure can be important even though a specific accrual cannot be measured reliably.
Reasonably possible
A reasonably possible loss generally is not accrued merely because it could happen. Material disclosure is the main concern.
Remote
Remote losses generally require neither accrual nor disclosure, subject to specific exceptions.
Ranges
If the estimate is a range, accounting depends on whether one amount is a better estimate than the others. Do not automatically choose the midpoint.
The takeaway
Probability determines the accounting path. Estimability determines whether you can book a number.
Related Summit guides
FAQ
Does reasonably possible mean accrue?
Generally no.
Does remote always mean no disclosure?
Usually, subject to specific exceptions.
What if a probable loss cannot be estimated?
Disclosure may be required without accrual.