CPA Exam LabFAR
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