CPA Contingencies Notes: ASC 450 Loss Contingencies and Subsequent Events [Worked Examples]

These CPA contingencies notes answer the core FAR question in one line: under ASC 450, accrue a loss only when it is probable that the company incurred a liability or impaired an asset at the balance sheet date and you can reasonably estimate the amount. If either test fails, do not accrue. Then apply the disclosure ladder. Disclose probable losses with no reasonable estimate. Also disclose reasonably possible losses. For remote losses, accrue nothing and disclose nothing. For subsequent events under ASC 855, Type 1 events adjust the statements because they confirm conditions that existed at year end, while Type 2 events do not adjust the statements because the condition arose after year end. See the CPA notes hub.

Both topics sit in FAR Area III, Select Transactions, at 25 to 35 percent. Specifically, contingencies are FAR.III.B under ASC 450, and subsequent events are FAR.III.I under ASC 855. In addition, Area I and Area II each carry 30 to 40 percent. Finally, FAR is a 4 hour section with 50 multiple choice questions and 7 task based simulations, and 75 is the passing score on a 0 to 99 scale.

CPA contingencies notes: the ASC 450 accrual test in plain words

Exam snippet: These CPA contingencies notes give you the exam core in one place: accrue a loss only when it is probable and reasonably estimable, disclose probable and reasonably possible losses, ignore remote losses, and treat Type 1 subsequent events as adjustments and Type 2 events as disclosure only.

A contingency is an existing condition that involves uncertainty about a future event. An estimate alone does not create a contingency. Depreciation is not a contingency, and amounts owed for services already received are not contingencies.

Under ASC 450-20-25-2, accrue only if both conditions hold. First, information available before issuance indicates that it is probable that the company impaired an asset or incurred a liability at the statement date. Second, you can reasonably estimate the amount of loss. If either condition fails, do not accrue.

ASC 450-20-25-1 uses three likelihood terms. Probable means the future event or events are likely to occur. In contrast, reasonably possible means the chance is more than remote but less than likely. Finally, remote means the chance is slight. The ASC text sets no numeric percentage for any term. However, a range does not delay accrual: under ASC 450-20-25-5, a range meets the estimable condition.

The disclosure ladder

Accrue a probable loss with a reasonable estimate, and disclose the nature of the accrual under ASC 450-20-50-1. Do not call it a reserve. Use estimated liability.

If a loss is probable but you cannot reasonably estimate it, make no accrual and disclose the loss under ASC 450-20-50-5. Then charge it to income when you can reasonably estimate it, not retroactively, under ASC 450-20-25-7.

Similarly, when a loss is reasonably possible, disclose it if the company incurred a loss or an additional loss and either it made no accrual or exposure exists above the amount it already accrued, under ASC 450-20-50-3. Disclose the nature and an estimate of the possible loss or range, or state that you cannot make an estimate, under ASC 450-20-50-4. A remote loss gets no accrual and no disclosure.

CPA contingencies notes: worked example 1, lawsuit range

All dollar figures here are illustrations only. For example, at 31 December, a lawsuit from an event before year end is probable, and counsel estimates the loss from $400,000 to $700,000, with no best estimate in the range. The loss is reasonably estimable as a range, so the accrual test passes.

First, under ASC 450-20-30-1, accrue the best estimate if one exists. Then, when none exists, accrue the minimum amount in the range.

Step	Calculation	Result
Low end	Stated low end	$400,000
High end	Stated high end	$700,000
Accrued	Minimum, no best estimate	$400,000
Extra exposure	$700,000 minus $400,000	$300,000

Debit Loss from litigation $400,000 and credit Estimated liability $400,000. Disclose the $300,000 additional exposure above the accrual, under ASC 450-20-50-3 and 50-4.

In particular, do not accrue the midpoint or maximum. For instance, the midpoint would be $550,000, from $400,000 plus $700,000 divided by 2, with no support in ASC 450-20-30-1. Finally, if $600,000 were the best estimate, accrue $600,000 and disclose $100,000.

Gain contingencies

A gain contingency usually stays out of the financial statements, because recording it might recognize revenue before its realization, under ASC 450-30-25-1. Hold recognition until the company realizes the gain or it becomes realizable. Do not accrue even a probable gain. Nevertheless, disclose a possible gain with care, under ASC 450-30-50-1.

CPA contingencies notes: worked example 2, Type 1 versus Type 2

All dollar figures here are illustrations only. Subsequent events occur after the balance sheet date but before the company issues the statements or makes them available for issuance. Evaluate them through the issuance date or the available-for-issuance date, under ASC 855-10-25-1A and 25-2. An SEC filer uses the issuance date and a non-SEC filer uses the available-for-issuance date.

First, ASC 855-10-25-1 requires recognition of events that provide additional evidence about conditions that existed at the balance sheet date: Type 1 recognized events. In contrast, ASC 855-10-25-3 gives the opposite rule for Type 2 events: do not recognize events about conditions that arose after the balance sheet date. Therefore, the timing of the underlying condition decides the type, not the timing of payment or settlement.

Type 1: customer bankruptcy confirms a pre-year-end receivable was impaired

At 31 December, one customer owes $300,000, with a $50,000 allowance in place, so the net receivable is $250,000. Before issuance, the customer files for bankruptcy, and the trustee confirms that the company will recover only $100,000. Therefore, this confirms a condition that existed at year end, so it is a Type 1 event under ASC 855-10-55-1(b), which covers events affecting the realization of assets after conditions that existed over a relatively long period.

Step	Calculation	Result
Receivable	Stated balance	$300,000
Recoverable	Confirmed by trustee	$100,000
Total loss	$300,000 minus $100,000	$200,000
Allowance	At year end	$50,000
Adjustment	$200,000 minus $50,000	$150,000
Final allowance	$50,000 plus $150,000	$200,000
Net receivable	$300,000 minus $200,000	$100,000

Debit Bad debt expense $150,000 and credit Allowance for doubtful accounts $150,000. Therefore, the final allowance is $200,000 and the final net receivable is $100,000. By contrast, a bankruptcy from a post-year-end event would be Type 2.

Type 2: fire destroys inventory after year end

For example, in January, before issuance, a fire destroys inventory with a cost of $250,000. The inventory stood undamaged at 31 December. Therefore, this is a Type 2 event under ASC 855-10-55-2(d). Make no entry to the 31 December statements.

However, disclose it if needed to keep the statements from being misleading. Under ASC 855-10-50-2, disclose the nature of the event and an estimate of its financial effect, or state that you cannot make an estimate. Here the disclosure gives the $250,000 cost as the financial effect. A non-SEC filer also discloses the evaluation date, under ASC 855-10-50-1. For a related measurement topic, see CPA fair value notes under ASC 820.

Similarly, the same logic covers litigation. Under ASC 855-10-55-1(a), a settlement after year end is Type 1 when the events giving rise to litigation took place before the balance sheet date. For example, if a lawsuit accrued at $500,000 settles for $650,000, the extra accrual is $150,000, from $650,000 minus $500,000, and the final liability is $650,000. In contrast, if the claim arose after year end, the settlement is Type 2 under ASC 855-10-55-2(c): no adjustment.

CPA contingencies notes: exam traps to avoid

In these CPA contingencies notes, the first trap is accruing a probable loss with no reasonable estimate. Instead, disclose it, and charge it later when estimable. Avoid using a percentage for probable, because the ASC text sets no numeric threshold. Also, do not accrue the midpoint or maximum of a range with no best estimate. Accrue the minimum. Do not accrue a gain contingency, even a probable one.

Finally, do not classify a subsequent event by the settlement or cash flow date. Classify it by the underlying condition date. For example, a January settlement of a pre-year-end claim is Type 1, while a January fire is Type 2. In addition, under ASC 855-10-25-4, do not recognize events between issuance and reissuance of statements unless GAAP or regulatory requirements require it. Do not call the accrual a reserve. Lastly, guarantees and commitments sit beside contingencies at FAR.III.B under ASC 460 and ASC 440.

One-page revision box

Test	Treatment
Probable, estimable loss	Accrue, disclose nature
Probable, not estimable	No accrual, disclose
Reasonably possible	Disclose nature and estimate
Remote	No accrual, no disclosure
Range, best estimate	Accrue best estimate
Range, no best estimate	Accrue minimum
Gain, even probable	Do not accrue, disclose with care
Type 1 event	Adjust
Type 2 event	Do not adjust
Reissued statements	Disclose if needed

In summary, keep this box beside the two worked examples in these CPA contingencies notes. Example 1: accrue $400,000, disclose $300,000 more. Example 2: adjust $150,000, disclose $250,000. For the full series, return to the CPA notes hub.

Sources

ASC 450-10: https://asc.understandingaccounting.org/asc/450/10/

Loss contingencies (ASC 450-20): https://asc.understandingaccounting.org/asc/450/20/

Gain contingencies (ASC 450-30): https://asc.understandingaccounting.org/asc/450/30/

ASC 855-10: https://asc.understandingaccounting.org/asc/855/10/

AICPA, what is tested: https://www.aicpa.org/resources/article/learn-what-is-tested-on-the-cpa-exam

AICPA and CIMA: https://www.aicpa-cima.com/professional-insights/article/the-new-cpa-exam-two-years-in

PocketCPA, FAR topics: https://pocketcpa.ai/cpa-exam/far/topics/

CPA Bear, subsequent events: https://book.cpabear.com/far/special-topics-and-transactions/subsequent-events

Study From Notes CPA notes hub: https://www.studyfromnotes.com/cpa-notes/

CPA fair value notes ASC 820: https://www.studyfromnotes.com/cpa-fair-value-asc820/