# ASC 450-20-05: Contingencies — Loss Contingencies — 05 Overview and Background Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/450/20/#05-overview-and-background) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T00:27:04.682Z to 2026-09-10T00:27:04.682Z Record version: sha256:9472162c66d70d5b78f31d72f538e33d562b9c64179fff4b581745fa4cf0cd9f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 450-20-05: 05 Overview and Background [Read section](https://asc.understandingaccounting.org/asc/450/20/#05-overview-and-background) SEC content: no ##### [450-20-05-1](https://asc.understandingaccounting.org/asc/450/20/#450-20-05-1) Pending content: no Source downloaded (UTC): 2026-09-10T00:27:04.682Z to 2026-09-10T00:27:04.682Z Record version: sha256:fc5531fa2af0e245d11f4f40ca8536b96363e7133ef980629c7977ea2c68bac9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic provides guidance for the recognition and disclosure of a [loss contingency](https://asc.understandingaccounting.org/glossary/l/#loss-contingency "An existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur. The term loss is used for convenience to include many charges against income that are commonly referred to as expenses and others that are commonly referred to as losses."). ##### [450-20-05-2](https://asc.understandingaccounting.org/asc/450/20/#450-20-05-2) Pending content: no Source downloaded (UTC): 2026-09-10T00:27:04.682Z to 2026-09-10T00:27:04.682Z Record version: sha256:aa6cd5473d021f34b82359e38f053420097fd0e3306eb2a1d1ed3562fdac1c62 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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: 1. a See Section 450-10-60 for references to other standards related to uncertainties that could result in either a gain or a loss. 2. b See Section 450-20-60 for references to other standards related to uncertainties that could result in a future loss. 3. c See Section 450-30-60 for references to other standards related to uncertainties that could result in a future gain. ##### [450-20-05-3](https://asc.understandingaccounting.org/asc/450/20/#450-20-05-3) Pending content: no Source downloaded (UTC): 2026-09-10T00:27:04.682Z to 2026-09-10T00:27:04.682Z Record version: sha256:ec4bd9670dd52178fe2069eb672ebc5e5ef3754d767a63966611452b7bc472dd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following are examples of loss contingencies for which links are provided in Section 450-20-60: 1. a Collectibility of receivables 2. b Obligations related to product warranties and product defects 3. c Risk of loss from catastrophes assumed by property and casualty insurance entities including [reinsurance](https://asc.understandingaccounting.org/glossary/r/#reinsurance "A transaction in which a reinsurer (assuming entity), for a consideration (premium), assumes all or part of a risk undertaken originally by another insurer (ceding entity). For indemnity reinsurance, the legal rights of the insured are not affected by the reinsurance transaction and the insurance entity issuing the insurance contract remains liable to the insured for payment of policy benefits. Assumption or novation reinsurance contracts that are legal replacements of one insurer by another extinguish the ceding entity's liability to the policyholder.") entities 4. d Guarantees of indebtedness of others 5. e Obligations of commercial banks under standby letters of credit 6. f Agreements to repurchase receivables (or to repurchase the related property) that have been sold. #### Dealing with Uncertainty when Accounting for Losses ##### [450-20-05-4](https://asc.understandingaccounting.org/asc/450/20/#450-20-05-4) Pending content: no Source downloaded (UTC): 2026-09-10T00:27:04.682Z to 2026-09-10T00:27:04.682Z Record version: sha256:8d9855ff65ed159a04b60e67adfe85c68cc3ff02af66e9eb1a3acb45af0fb651 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Accounting standards use two primary approaches to dealing with uncertainty in loss circumstances: 1. a Recognition using a probability threshold 2. b Measurement using a fair value objective. ##### [450-20-05-5](https://asc.understandingaccounting.org/asc/450/20/#450-20-05-5) Pending content: no Source downloaded (UTC): 2026-09-10T00:27:04.682Z to 2026-09-10T00:27:04.682Z Record version: sha256:8722f9fe6a72d2dd3e010b0a7d4d6cc76e5780839095ab076693aebab03d613f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subtopic deals with uncertainty by requiring a probability threshold for recognition of a loss contingency and that the amount of the loss be reasonably estimable. As noted in paragraph [450-20-30-1](https://asc.understandingaccounting.org/asc/450/20/#450-20-30-1), when both of those recognition criteria are met, and the reasonably estimable loss is a range, it requires accrual of the amount that appears to be a better estimate than any other estimate within the range, or accrual of the minimum amount in the range if no amount within the range is a better estimate than any other amount. ##### [450-20-05-6](https://asc.understandingaccounting.org/asc/450/20/#450-20-05-6) Pending content: no Source downloaded (UTC): 2026-09-10T00:27:04.682Z to 2026-09-10T00:27:04.682Z Record version: sha256:d08235897217a0aa04f58f5c4e5fac416a9169065af76ba93f27c1e8abc6e123 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In contrast, fair value is not an estimate of the ultimate settlement amount or the present value of an estimate of the ultimate settlement amount. Uncertainty in the amount and timing of the future cash flows necessary to settle a liability and the likelihood of possible outcomes are incorporated into the measurement of the fair value of the liability. For example, a third party would charge a price to assume an uncertain liability even though the likelihood of a future sacrifice is less than [probable](https://asc.understandingaccounting.org/glossary/p/#probable "The future event or events are likely to occur."). Similarly, when the likelihood of a future sacrifice is probable, the price a third party would charge to assume an obligation incorporates expectations about some future events that are less than probable. Recognizing the fair value of an obligation results in recognition of some obligations for which the likelihood of future settlement, although more than zero, is less than probable from a loss contingencies perspective. ##### [450-20-05-7](https://asc.understandingaccounting.org/asc/450/20/#450-20-05-7) Pending content: no Source downloaded (UTC): 2026-09-10T00:27:04.682Z to 2026-09-10T00:27:04.682Z Record version: sha256:372d4c753301eab467f2c6b79f1d68e9e32e9e0ee90962df5282e4f5a64ca2b2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Because this Subtopic deals with uncertainty differently, the recognition guidance in Section 450-20-25 is inconsistent with standards in other Topics that have an objective of measuring fair value. #### Accruals of Loss Contingencies Do Not Provide Financial Protection ##### [450-20-05-8](https://asc.understandingaccounting.org/asc/450/20/#450-20-05-8) Pending content: no Source downloaded (UTC): 2026-09-10T00:27:04.682Z to 2026-09-10T00:27:04.682Z Record version: sha256:b2a97074e11ee9172659787a609d15e22f530ceff03ac7719dbe428a44829efd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Accrual of a loss related to a [contingency](https://asc.understandingaccounting.org/glossary/c/#contingency "An existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an entity that will ultimately be resolved when one or more future events occur or fail to occur.") does not create or set aside funds to lessen the possible financial impact of a loss. Confusion exists between accounting accruals (sometimes referred to as accounting reserves) and the reserving or setting aside of specific assets to be used for a particular purpose or contingency. Accounting accruals are simply a method of allocating costs among accounting periods and have no effect on an entity's cash flow. Those accruals in no way protect the assets available to replace or repair uninsured property that may be lost or damaged, or to satisfy claims that are not covered by insurance, or, in the case of insurance entities, to satisfy the claims of insured parties. Accrual, in and of itself, provides no financial protection that is not available in the absence of accrual. ##### [450-20-05-9](https://asc.understandingaccounting.org/asc/450/20/#450-20-05-9) Pending content: no Source downloaded (UTC): 2026-09-10T00:27:04.682Z to 2026-09-10T00:27:04.682Z Record version: sha256:e5ce226c188ec818a1c023f07f42cff8331095bc8fbdb5d2e3f59ff9519a4cf2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. #### Types of Loss Contingencies ##### [450-20-05-10](https://asc.understandingaccounting.org/asc/450/20/#450-20-05-10) Pending content: no Source downloaded (UTC): 2026-09-10T00:27:04.682Z to 2026-09-10T00:27:04.682Z Record version: sha256:f5127f5756dee008ca463c5fb1100da72f5a751a05cd8d3022792aaa194c4e0c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following are examples of loss contingencies that are discussed in this Subtopic: 1. a Injury or damage caused by products sold 2. b Risk of loss or damage of property by fire, explosion, or other hazards 3. c Actual or possible claims and assessments 4. d Threat of expropriation of assets 5. e Pending or threatened litigation.