This Subtopic provides guidance for the recognition and disclosure of a
loss contingency.
This Subtopic, in combination with Subtopics
450-10 and
450-30, provides general guidance regarding gain and loss contingencies. Other Topics include gain or loss contingencies related to those specific Topics. Therefore, the Contingencies Topic does not include all standards related to contingencies. While not intended to be all-inclusive, the following Relationships Sections within the Contingency Subtopics provide links to many Topic-specific contingencies:
- a
See Section
450-10-60 for references to other standards related to uncertainties that could result in either a gain or a loss.
- b
See Section
450-20-60 for references to other standards related to uncertainties that could result in a future loss.
- c
See Section
450-30-60 for references to other standards related to uncertainties that could result in a future gain.
The following are examples of loss contingencies for which links are provided in Section
450-20-60:
- a
Collectibility of receivables
- b
Obligations related to product warranties and product defects
- c
Risk of loss from catastrophes assumed by property and casualty insurance entities including reinsurance entities - d
Guarantees of indebtedness of others
- e
Obligations of commercial banks under standby letters of credit
- f
Agreements to repurchase receivables (or to repurchase the related property) that have been sold.
Accounting standards use two primary approaches to dealing with uncertainty in loss circumstances:
- a
Recognition using a probability threshold
- b
Measurement using a fair value objective.
An entity may choose to maintain or have access to sufficient liquid assets to replace or repair lost or damaged property or to pay claims in case a loss occurs. Alternatively, it may transfer the risk to others by purchasing insurance. The accounting standards set forth in this Subtopic do not affect the fundamental business economics of that decision. That is a financial decision, and if an entity's management decides to do neither, the presence or absence of an accrued credit balance on the balance sheet will have no effect on the consequences of that decision. Insurance or reinsurance reduces or eliminates risks and the inherent earnings fluctuations that accompany risks. Unlike insurance and reinsurance, the use of accounting reserves does not reduce or eliminate risk. The use of accounting reserves is not an alternative to insurance and reinsurance in protecting against risk. Earnings fluctuations are inherent in risk retention, and they are reported as they occur.