Section 3: 25–35%3B
Contingencies and Commitments
Contingencies are potential liabilities (or assets) that depend on future events. The exam rigorously tests the three-tier probability framework — probable, reasonably possible, remote — and the difference between accrual and disclosure. Getting this wrong changes the balance sheet and income statement simultaneously.
What AICPA Wants You to Know
- 1Apply the three-level probability framework: probable, reasonably possible, remote
- 2Determine when a loss contingency is accrued vs. disclosed vs. ignored
- 3Explain the conservative treatment of gain contingencies
- 4Compute the amount to accrue when a range is given (minimum of the range rule)
- 5Identify commitments and their disclosure requirements