Contingencies and commitments
A loss contingency CPA exam item is a two-part test — probable and reasonably estimable — and when the estimate is a range with no better point inside it, US GAAP accrues the low end and discloses the range. Not the midpoint. The midpoint is the answer under IFRS, and it is the single most reliable wrong answer on this group for candidates who have studied both.
| Blueprint group | FAR-III-B |
| Area weight | 25–35% |
| Approx. share of the exam | 4.3% |
What the Blueprint asks for here
At this group the Blueprint expects a candidate to determine whether a contingency should be accrued, disclosed or neither, to calculate the amount accrued for a loss contingency, and to identify the commitments and undertakings that require disclosure.
This is our paraphrase, not the Blueprint’s wording. verbatim quote pending The authoritative representative-task text is in the AICPA Blueprints, which are published free — download them and read the group directly. We will not print a quotation we have not taken from the source document.
Loss contingency CPA exam items: contingencies in FAR are a two-part test
Why this group is worth its weight
Contingencies is a judgement group with a short decision tree, which makes it one of the highest-yield things a candidate can drill. It is also asymmetric in a way that shows up in almost every fact pattern: losses and gains are not treated the same, and the asymmetry is the point rather than an inconsistency.
The decision tree, in full
A loss contingency is accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. It is disclosed only when it is reasonably possible, or when it is probable but cannot be reasonably estimated. It is neither accrued nor disclosed when the chance is remote, with a narrow exception for obligations under which the entity stands behind another party. Gain contingencies are not accrued at all — they are disclosed with care not to imply realisation, because recognising a gain that has not occurred is exactly the asymmetry the framework is guarding against.
The range rule, and where it comes from
When the loss is probable and the estimate is a range in which no amount is a better estimate than any other, the amount accrued is the minimum of the range, and the range itself is disclosed so the reader can see the exposure. The reasoning is that the minimum is the amount for which the probable-and-estimable test is satisfied; anything above it is possible rather than probable. IFRS reaches a different answer — the midpoint of the range — and candidates who have prepared for both exams often reproduce the wrong one under time pressure.
What else the group covers
Warranties are loss contingencies that almost always meet both tests and so are accrued at the point of sale. Litigation is where the probable-versus-reasonably-possible judgement actually bites, and the fact pattern will normally hand you the assessment in those exact words rather than asking you to form it. Unconditional purchase obligations and other commitments are disclosure items, not accruals, and appear as the option designed to catch someone who has accrued everything in sight.
The standard this group is examined on is published by the standard setter: FASB Accounting Standards Codification. The Blueprint coordinates and weight ranges above come from the AICPA Blueprints. What is ours, and labelled as ours, is the reading, the practice item and the misconception tags.
A practice item
our own practice item Written by us against the public Blueprint. It is not an AICPA question and it is not taken from any review course.
A company is the defendant in a lawsuit. Its counsel advises that it is probable the company will be found liable, and that the loss will be somewhere between $200,000 and $500,000. Counsel advises that no amount within that range is a better estimate than any other.
What amount should the company accrue as a loss contingency?
| A | $200,000 | correct |
| B | $350,000 | |
| C | $500,000 | |
| D | $0, with disclosure of the range |
The rule
A loss contingency is accrued when it is probable that a liability has been incurred at the reporting date and the amount of loss can be reasonably estimated. When the reasonable estimate is a range and no amount within the range is a better estimate than any other, the amount accrued is the low end of the range and the range is disclosed. A contingency that is reasonably possible, or probable but not reasonably estimable, is disclosed rather than accrued.
The arithmetic
Both parts of the test are met: counsel says the loss is probable and gives a range, so it is reasonably estimable. With no better point inside the range, the accrual is the minimum, $200,000, and the $200,000 to $500,000 range is disclosed. The midpoint of $350,000 is the IFRS answer and the reason it appears as an option.
What we would ask you first
This is the part of the product that is hard to show without an account, so here it is directly: for each wrong option above, the opening question our tutor asks — before any explanation — targeting the specific mistake that option represents. Choosing B ($350,000) and choosing D ($0, with disclosure of the range) are different errors and deserve different first questions.
If you chose B — midpoint_accrued
“You took the middle of the range, which is the answer under the other major framework. Under US GAAP, which point in the range is the one where 'probable and reasonably estimable' is actually satisfied?”
If you chose C — maximum_accrued
“You accrued the worst case. Is a $500,000 loss probable on these facts, or is it the top of a range that also contains much smaller outcomes?”
If you chose D — disclosure_only
“You stopped at disclosure. Disclosure alone is right when a loss is reasonably possible, or probable but not estimable. Which of those describes this fact pattern?”
To be precise about what happens next: the exchange is a rate limit, not a gate. Answering well gets you to the full worked explanation in three or four exchanges; answering badly still gets you there. And if you would rather skip it, asking three times gets you the walkthrough.
Common questions
When is a loss contingency accrued?
When it is probable that a liability has been incurred at the reporting date and the amount can be reasonably estimated. If it is reasonably possible, or probable but not reasonably estimable, it is disclosed instead. If the chance is remote, neither accrual nor disclosure is generally required.
What do you accrue when the loss is a range?
Under US GAAP, the low end of the range when no amount within it is a better estimate than any other, with the range disclosed. Accruing the midpoint is the IFRS treatment and is the most common wrong answer on this group.
Misconception tags in this group
These are the labels our diagnosis attaches when a wrong answer matches a known pattern. They are worth reading even if you never use the product — naming your own error is most of the work.
midpoint_accrued— Accruing the midpoint of a range, which is the IFRS treatment rather than the US GAAP one.maximum_accrued— Accruing the top of the range as though the worst case were the probable one.disclosure_only— Disclosing without accruing when both parts of the test are met.gain_contingency_accrued— Accruing a gain contingency, which is not recognised until realised.remote_disclosed— Disclosing a remote contingency that requires neither accrual nor disclosure.