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Chapter 2 — Loss Contingencies and Commitments

2.3 Recognition

2.3 Recognition

ASC 450-20
25-1 When a loss contingency exists, the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability can range from probable to remote. As indicated in the definition of contingency, 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. The Contingencies Topic uses the terms probable, reasonably possible, and remote to identify three areas within that range.
25-2 An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met:
  1. Information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. Date of the financial statements means the end of the most recent accounting period for which financial statements are being presented. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.
  2. The amount of loss can be reasonably estimated.
The purpose of those conditions is to require accrual of losses when they are reasonably estimable and relate to the current or a prior period. Paragraphs 450-20-55-1 through 55-17 and Examples 1–2 (see paragraphs 450-20-55-18 through 55-35) illustrate the application of the conditions. As discussed in paragraph 450-20-50-5, disclosure is preferable to accrual when a reasonable estimate of loss cannot be made. Further, even losses that are reasonably estimable shall not be accrued if it is not probable that an asset has been impaired or a liability has been incurred at the date of an entity’s financial statements because those losses relate to a future period rather than the current or a prior period. Attribution of a loss to events or activities of the current or prior periods is an element of asset impairment or liability incurrence.
The flowchart below provides an overview of the contingent liability recognition criteria, taking into consideration all information about the loss that becomes available before the financial statements are issued (or are available to be issued).

Footnotes

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This position is consistent with the guidance in ASC 420 and ASC 805-20-55-50 and 55-51, which indicate that the liability for termination benefits and curtailment losses that will be triggered by the consummation of a business combination should be recognized only upon completion of the business combination.