FAR · Select transactions · 6 practice questions
ASC 450: Calculate the Total Loss Contingency Accrual
Accrue only probable, reasonably estimable losses, using the best estimate or the minimum of a range with no best estimate. Below: a worked calculation that keeps possible additional losses out of the accrued total.
Try one first
Hint
Determine which matters are both probable and reasonably estimable as of the balance-sheet date; if a probable loss has a range and no best estimate, accrue the minimum of the range.
Answer C. Accrue only losses that are both probable and reasonably estimable as of the balance-sheet date. For the customer lawsuit (probable; range; no single best estimate), accrue the minimum of the range: $420,000. For the supplier claim (probable; best estimate), accrue $310,000. The environmental claim (reasonably possible) and the wrongful-termination claim (probable but not reasonably estimable as of December 31) are not accrued. Total = $420,000 + $310,000 = $730,000.
Why not A: Tempting because the supplier claim is clearly probable and has a best estimate, but this choice incorrectly ignores the customer lawsuit. When a loss is probable and a range exists with no single best estimate, ASC 450 requires accruing the minimum of that range ($420,000), so both $420,000 and $310,000 should be accrued.
Why not B: Tempting if a candidate treats a reasonably possible loss as if it were probable and accruable (e.g., adding the $180,000 low end of the environmental range). However, reasonably possible contingencies are disclosed, not accrued; only probable and reasonably estimable losses are recognized.
Why not D: Tempting because it uses the customer's maximum ($760,000) plus the supplier amount. This is incorrect: when a probable loss has a range and no amount is a better estimate, the minimum of the range is accrued ($420,000), not the maximum.
Worked example
At December 31, Vale Co. has two claims from a current-year product defect. Both losses are probable. Claim A ranges from $60,000 to $100,000, with no better estimate. Claim B ranges from $30,000 to $50,000, with $40,000 the best estimate. No insurance applies, and no amounts have been paid or recorded.
| 1 | Apply the recognition testBoth claims: probable + reasonably estimable = accrue | Accrue both claims |
| 2 | Measure Claim AMinimum of $60,000 to $100,000 = $60,000 | $60,000 |
| 3 | Measure Claim BBest estimate within $30,000 to $50,000 = $40,000 | $40,000 |
| 4 | Add accrued amounts only$60,000 + $40,000 = $100,000 | $100,000 |
| 5 | Disclose possible additional lossesClaim A: $100,000 - $60,000 = $40,000; Claim B: $50,000 - $40,000 = $10,000. | Up to $40,000 for A and $10,000 for B; no increase to the $100,000 accrual. |
Vale should report a $100,000 loss contingency liability and disclose possible additional losses of up to $40,000 for Claim A and $10,000 for Claim B.
Check: Accrued total = Claim A's $60,000 minimum + Claim B's $40,000 best estimate; disclosure amounts stay outside the total.
Key points
- Include assurance-type warranty costs when they are probable and reasonably estimable from reliable experience.
- Do not replace an identified best estimate with a probability-weighted average.
- Recognize probable, reasonably estimable insurance recoveries separately, limited to the recognized loss; recognize excess recoveries only when realized or realizable.
How the exam traps you
- Adding reasonably possible losses to the liability total. Disclose them separately; only probable, reasonably estimable losses enter the accrual.
- Using the midpoint or maximum when no estimate is better. Accrue the range minimum, then disclose possible additional loss.
- Subtracting expected insurance proceeds from the loss liability. Keep the full loss liability; assess any insurance recovery separately.
Question 2
Hint
Handle each matter separately first, then combine them. For the lawsuit, focus on what GAAP requires when loss is probable and a range is given with no best estimate within that range.
Answer D. Recognize the warranty expense now: $8,000,000 × 1.5% = $120,000. The lawsuit loss is probable and reasonably estimable only as a range ($600,000-$900,000); when no amount in the range is a better estimate, GAAP requires accrual of the minimum ($600,000) and disclosure of the range. Combined liability = $120,000 + $600,000 = $720,000, with disclosure of possible additional loss up to $300,000.
Why not A: Even though the exact lawsuit amount is uncertain, counsel's opinion that an unfavorable outcome is probable and a reasonably estimable range exists means the loss must be accrued (at the low end) rather than deferred to disclosure-only.
Why not B: Recording the maximum loss ($900,000) instead of the minimum is incorrect when no single amount is a better estimate; GAAP requires accrual of the low end of the range and disclosure of the remainder, so omitting disclosure is also wrong.
Why not C: Using the midpoint to accrue a range is a common intuition but is not GAAP: if no amount in the range is a better estimate, the low end must be accrued and the range disclosed rather than recording the midpoint.
Question 3
Hint
First separate which items are recognized versus only disclosed. Then handle the lawsuit's loss range using the rule for a range with no better estimate.
Answer B. Marin should accrue $400,000 for the product-liability lawsuit because the loss is probable and, when a range exists but no amount in the range is a better estimate, U.S. GAAP requires accrual of the minimum amount in the range. Marin should also accrue $180,000 for the probable, estimable warranty obligation, for a total accrual of $580,000. The lawsuit still requires disclosure of the additional possible loss (up to $300,000), and the government investigation, being reasonably possible but not probable, should be disclosed, not accrued.
Why not A: Tempting because the accrued total is correct, but wrong because the lawsuit requires disclosure of the additional possible loss beyond the amount accrued; omitting that disclosure is not appropriate under U.S. GAAP.
Why not C: Attractive if a candidate uses the high end of the lawsuit range, but incorrect: when no amount in a probable-loss range is a better estimate, the minimum of the range is accrued (not the maximum). The $880,000 total incorrectly uses $700,000 for the lawsuit plus $180,000 warranty.
Why not D: This reflects erroneously accruing the government penalty (a reasonably possible loss should be disclosed, not accrued). It also fails to disclose the lawsuit's additional possible exposure beyond the amount accrued.
Question 4
Hint
Separate items that are accrued from items that are only disclosed, and pay close attention to how U.S. GAAP treats a range when no point in the range is a better estimate.
Answer B. Accrue only losses that are probable and reasonably estimable. For the patent litigation, because no amount within the $900,000-$1,300,000 range is a better estimate, accrue the minimum of $900,000. For the customer claim, accrue the better estimate of $400,000. The regulatory matter (reasonably possible) is disclosed, not accrued, and expected future legal fees to be incurred in 20X6 are recognized as expense when incurred and are not accrued at 12/31/20X5.
Why not A: This total ($900,000 + $400,000 + $120,000) incorrectly includes the $120,000 of expected future legal fees. Future outside counsel fees to be incurred in the next period are not accrued at year-end unless they are part of the estimated obligation.
Why not C: This total ($900,000 + $400,000 + $300,000) incorrectly accrues the regulatory inquiry. The regulatory matter is only reasonably possible and should be disclosed, not accrued under ASC 450.
Why not D: This figure reflects using the maximum of the patent litigation range ($1,300,000) plus the $400,000 customer claim and adding the $120,000 legal fees. When no single amount in a probable loss range is a better estimate, GAAP requires accrual of the minimum amount in the range, and future legal fees are excluded.
Question 5
Hint
Evaluate each matter separately, then include only losses that meet both recognition criteria. For a probable range with no better estimate, focus on how GAAP handles the range.
Answer C. Accrue only losses that are both probable and reasonably estimable. Accrue the $180,000 warranty obligation. For the probable litigation with a $300,000-$500,000 range and no better estimate, GAAP requires accrual of the minimum amount ($300,000). The environmental matter is only reasonably possible and is not accrued. Total accrual = $180,000 + $300,000 = $480,000.
Why not A: Tempting if a candidate remembers to accrue the warranty but (incorrectly) believes the probable litigation cannot be accrued unless one exact amount is identified. Under ASC 450, when a probable loss is reasonably estimable as a range and no amount is a better estimate, accrue the minimum of the range, so add $300,000.
Why not B: Tempting if a candidate uses the midpoint ($400,000) of the $300,000-$500,000 litigation range. GAAP does not default to the midpoint here; when no amount in the range is a better estimate, the low end is accrued.
Why not D: Tempting if a candidate accrues the reasonably possible environmental matter in addition to the warranty and litigation. Reasonably possible losses are disclosed (if material) but are not accrued.
Question 6
Hint
Separate the matters by likelihood first, then decide how U.S. GAAP measures a probable loss when a range exists.
Answer A. Accrue losses that are both probable and reasonably estimable. For the product liability case no amount within the $450,000-$700,000 range is a better estimate, so GAAP requires accruing the minimum of the range ($450,000). For the patent case accrue the best estimate ($1,100,000); the reasonably possible customer claim is disclosed but not accrued. Total accrual = $450,000 + $1,100,000 = $1,550,000.
Why not B: This result comes from using the maximum of the first probable range ($700,000) plus the patent best estimate ($1,100,000). When no amount within a probable-range is a better estimate than another, U.S. GAAP requires accruing the minimum of that range, not the maximum.
Why not C: This adds the reasonably possible customer claim (typically using its minimum $300,000) to the two probable accruals (450,000 + 1,100,000). Reasonably possible losses are generally disclosed, not accrued under U.S. GAAP, so including any amount for that third matter overstates the liability.
Why not D: This reflects using the maximum of the first probable range ($700,000), adding the patent best estimate ($1,100,000), and also accruing the reasonably possible claim ($300,000). Both using the range maximum when no best estimate exists and accruing a merely reasonably possible loss are inconsistent with U.S. GAAP.
Common questions
How do you calculate the total accrual for multiple contingencies?
Evaluate each loss separately. Add only probable, reasonably estimable losses, using each best estimate or its range minimum when none is better.
When does ASC 450 require the minimum of a loss range?
Use the minimum when a loss is probable and reasonably estimable as a range, but no amount is a better estimate. An identified best estimate overrides the minimum.
Do you disclose a contingency after recording an accrual?
Yes, if an additional loss is reasonably possible. Disclose that exposure separately; it does not increase the liability unless the recognition and measurement criteria support a larger accrual.
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