Contingencies and Commitments
Contingencies are a reliable FAR topic, and the questions almost always test the same decision tree: accrue, disclose, or do nothing? The framework under ASC 450 is probable / reasonably possible / remote, and only probable AND estimable triggers an accrual. The traps are predictable: candidates accrue a 'reasonably possible' loss, accrue a gain (never allowed), or pick the wrong number from a loss range. When a range has no better estimate, you accrue the minimum. Get the framework down and these become easy points.
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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