Question

When should a contingent loss, such as an unfavorable outcome of a lawsuit, be accrued as a liability in the financial statements? Please include FASB Codification

Answer 1

A contingent loss such as an unfavourable outcome of a lawsuit can be accrued as a liability in financial statements (a)when it is probable i.e if the future event is likely to occur and (b) when the amount of liability can be reasonably estimated.

When both these conditions are not met i.e. if the liability is reasonably possible but not probable ( chance of occurring of event is more than remote but less than likely) or if the liability is probable but cannot be reasonably estimated then we can disclose the existence of contingent loss in the footnotes to the financial statements.

FASB Codification:

FASB Statement No. 5 defines a contingency as “an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur”

According to FASB Statement No. 5, if the liability is probable and the amount can be reasonably estimated, companies should record contingent liabilities in the accounts.