When do I accrue a contingent loss versus just disclose it?

Question

AcadiFi · Accepted Answer

For a loss contingency, accrue the loss when it is probable that a liability has been incurred and the amount can be reasonably estimated. If the loss is reasonably possible but not probable, or if it is probable but cannot be reasonably estimated, disclose it in the notes. If the chance of loss is remote, no action is usually needed unless GAAP has a special disclosure requirement.

Example: Willow Bend Labs is sued over a patent issue. Its counsel believes the company will probably lose and estimates the settlement range at $180,000 to $260,000, with no amount in the range more likely than another. Willow Bend should accrue $180,000 and disclose that additional exposure up to $80,000 exists. If counsel instead says losing is only reasonably possible, no accrual is recorded; the company only discloses the range.

The FAR trap is using the midpoint of the range by default. Under GAAP, if no amount within a range is a better estimate, accrue the minimum amount in the range. Another trap is thinking management intent matters. The focus is on likelihood and reasonable estimation at the reporting date. A quick decision tree is helpful: probable plus estimable means accrue; everything less certain usually means disclose only. Practice more in our CPA FAR question bank.

When do I accrue a contingent loss versus just disclose it?

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