Loss and gain contingencies: recognition, range measurement, and disclosure
Use probability and estimability to resolve loss contingencies, range accruals, disclosures, and gain contingencies on FAR.
The decision that earns the point
Classify the item before measuring it
Accrue an estimated loss contingency when information available before issuance indicates the loss is probable and the amount can be reasonably estimated. If a range is estimable and one amount is a better estimate, accrue that amount; if no amount is better, accrue the minimum and disclose the exposure above it when required. Gain contingencies ordinarily are not recognized before realization.
Exam use
FAR can ask whether a lawsuit, guarantee, or other contingency is accrued, disclosed, or neither; it can also test the amount recorded when the estimate is a point or range.
Your scratch-paper plan
Solve it in three moves
- 1
Evaluate probability at the reporting date
Use the available facts to classify the likelihood that an asset was impaired or a liability was incurred at the financial-statement date.
FASB ASC 450-20: Loss Contingencies - 2
Determine whether the amount is estimable
Use a supported point estimate when one amount is best; otherwise apply the range rule instead of averaging unsupported endpoints.
FASB ASC 450-20: Loss Contingencies - 3
Keep gains out of premature income
Do not recognize a gain contingency before realization merely because collection appears probable; evaluate appropriate disclosure without implying certainty.
FASB ASC 450-20: Loss Contingencies
Worked problem
Work the facts before choosing the answer
Counsel concludes that a lawsuit loss is probable. The loss is reasonably estimated from $300,000 to $500,000, and $350,000 is the best estimate within the range. A separate $400,000 gain claim is probable but unrealized.
CPAPass exam analysis using the stated assumptions
Show the work
The probable and estimable loss satisfies both accrual conditions, and the best estimate is $350,000. The possible additional loss above the accrued amount is $150,000. The unrealized gain is not recorded as income.
Rule source: FASB ASC 450-20: Loss ContingenciesAnswer
Debit loss and credit the liability for $350,000, then provide the required loss-contingency disclosure. Do not record the separate $400,000 gain under the stated facts.
Rule source: FASB ASC 450-20: Loss ContingenciesDo it now
Test the same decision with a fresh question
Start with free FAR practice. Create an account only when you want the 5-day no-card CPAPass trial and continued section practice.
The trap and the repair
Common trap
Automatically accruing the midpoint of a range ignores whether one amount is a better estimate and can overstate the required liability.
Repair
Resolve probability, estimability, and the range hierarchy in that order, then decide disclosure separately from the journal entry.
Authority and scope boundary
FASB ASC 450-20 controls general gain and loss contingencies. Different recognition models can apply to guarantees, business combinations, credit losses, and other scoped transactions, while audit procedures remain an AUD owner.
2026 Uniform CPA Examination Blueprints and FASB ASC 450-20: Loss Contingencies were reviewed on 2026-08-14. Check a newer authority when the effective date or facts change.
Probability and estimability matrix
Choose recognition and disclosure without averaging by habit
A loss contingency needs both a likelihood conclusion and a measurement conclusion. A gain uses a different recognition boundary.
| Evidence state | Financial-statement response | Exam checkpoint | Authority |
|---|---|---|---|
| Probable and reasonably estimable loss | Accrue the supported amount | Record the liability and evaluate disclosure | FASB ASC 450-20: Loss Contingencies |
| Reasonably possible loss | Do not accrue solely on that likelihood | Disclose nature and possible loss or range when required | FASB ASC 450-20: Loss Contingencies |
| Range with a best estimate | $300,000 to $500,000 with $350,000 best estimate | Accrue $350,000, not the $400,000 midpoint | FASB ASC 450-20: Loss Contingencies |
| Unrealized gain contingency | No income recognition under the closed facts | Consider careful disclosure without implying realization | FASB ASC 450-20: Loss Contingencies |
After a miss
Repair a contingency decision miss
- 1
Write probability and estimability as separate gates before reading any dollar range.
- 2
Rework the lawsuit once with no amount better than another and identify the accrued minimum plus the additional exposure.
- 3
Answer a fresh FAR contingency question and record whether recognition, measurement, or disclosure caused the miss.
Your exam workflow
- Step 1Identify the requirementUse the available facts to classify the likelihood that an asset was impaired or a liability was incurred at the financial-statement date.FASB ASC 450-20: Loss Contingencies
- Step 2Classify the factsUse a supported point estimate when one amount is best; otherwise apply the range rule instead of averaging unsupported endpoints.FASB ASC 450-20: Loss Contingencies
- Step 3Apply the authorityDo not recognize a gain contingency before realization merely because collection appears probable; evaluate appropriate disclosure without implying certainty.FASB ASC 450-20: Loss Contingencies
- Step 4Check the outputDebit loss and credit the liability for $350,000, then provide the required loss-contingency disclosure. Do not record the separate $400,000 gain under the stated facts.FASB ASC 450-20: Loss Contingencies
Keep the next step narrow
Quick questions
What is the key rule?
Accrue an estimated loss contingency when information available before issuance indicates the loss is probable and the amount can be reasonably estimated. If a range is estimable and one amount is a better estimate, accrue that amount; if no amount is better, accrue the minimum and disclose the exposure above it when required. Gain contingencies ordinarily are not recognized before realization.
How can this topic be tested on the CPA Exam?
FAR can ask whether a lawsuit, guarantee, or other contingency is accrued, disclosed, or neither; it can also test the amount recorded when the estimate is a point or range.
What mistake most often changes the result?
Automatically accruing the midpoint of a range ignores whether one amount is a better estimate and can overstate the required liability. Resolve probability, estimability, and the range hierarchy in that order, then decide disclosure separately from the journal entry.
Where should I practice the decision?
After the worked example, open the FAR free-practice link and work a fresh question that tests the same decision. If the miss depends on Accrual accounting, review that handoff before trying another set.